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A Comprehensive Guide: How to Forecast Revenues for Your Business Plan

Introduction:.

Forecasting revenues is a crucial aspect of developing a business plan. Accurate revenue projections not only attract investors but also provide a roadmap for sustainable growth and financial success. This article will provide you with a step-by-step guide to help you forecast revenues effectively. By following these strategies and best practices, you can make informed decisions, set realistic goals, and build a solid foundation for your business.

I. Understand Your Market and Customers:

Before you can forecast revenues, it's essential to gain a deep understanding of your target market and customers. Conduct market research to analyze trends, demand, and competition. Identify your target audience's needs, preferences, and purchasing behavior. This information will help you estimate the potential market size and assess the revenue potential for your products or services.

II. Break Down Revenue Streams:

Next, break down your revenue streams into specific categories. For example, if you have multiple products or services, create separate revenue streams for each. Consider the pricing structure, sales volume, and average transaction value for each category. This breakdown enables you to analyze and forecast revenues with greater accuracy.

III. Utilize Historical Data:

If you have been in business for some time, historical data can serve as a valuable resource for revenue forecasting. Analyze past financial records, sales data, and customer trends. Identify patterns, seasonal variations, and growth rates. Use this information as a baseline to project future revenues, accounting for any market changes or new product launches.

IV. Determine Key Assumptions:

Forecasting revenues involves making certain assumptions about your business and the market. Identify the key factors that will impact your revenue projections, such as market growth rates, pricing changes, or shifts in consumer behavior. Document these assumptions clearly, ensuring they are realistic and supported by data and market trends.

V. Use Multiple Forecasting Methods:

To enhance the accuracy of your revenue projections, employ various forecasting methods. Here are a few commonly used techniques:

a) Top-Down Approach:

Start with the overall market size, estimate your market share, and calculate revenues based on this share.

b) Bottom-Up Approach:

Begin with individual product or service sales projections and aggregate them to obtain total revenue estimates.

c) Time-Series Analysis:

Analyze historical sales data to identify patterns, trends, and seasonality. Apply statistical methods like moving averages or exponential smoothing to project future revenues.

d) Market Research and Surveys:

Conduct market surveys or customer interviews to gather insights on demand, price sensitivity, and purchasing behavior. Use this data to estimate market size and forecast revenues.

VI. Account for External Factors:

Consider external factors that could impact your revenue forecast, such as economic conditions, industry trends, regulatory changes, or technological advancements. Conduct a thorough analysis of these factors and assess their potential influence on your business. Adjust your revenue projections accordingly to reflect any anticipated challenges or opportunities.

VII. Monitor and Review:

Once you have developed your revenue forecast, it is crucial to continuously monitor and review its accuracy. Regularly compare your projections with actual revenue performance and adjust your forecast as needed. Use key performance indicators (KPIs) to track your progress and make informed decisions to drive revenue growth.

By following the steps outlined in this guide, you can enhance the accuracy and reliability of your revenue forecast for your business plan.

Here are a few additional tips to keep in mind:

Sensitivity Analysis:

Perform a sensitivity analysis by testing your revenue projections against various scenarios. This will help you understand the potential impact of changes in key variables such as pricing, market share, or economic conditions. It provides a more comprehensive view of the range of possible outcomes.

Seek Expert Advice:

If you're unsure about certain aspects of revenue forecasting or lack expertise in financial analysis, consider consulting with us. At businessplanprovider.com , we have professionals such as accountants, financial advisors, and industry experts. Their insights and guidance can add credibility to your revenue forecast.

Regularly Update Your Forecast:

Revenue forecasting is not a one-time exercise. As your business grows and market conditions evolve, it's crucial to update your forecast regularly. Review and revise your projections quarterly or annually, taking into account any new information or changes in your business environment.

Validate with Market Feedback:

Don't rely solely on internal data or assumptions. Seek feedback from potential customers, industry experts, or mentors to validate your revenue projections. Incorporate their insights into your forecast, as they can provide valuable perspectives and highlight blind spots.

Be Realistic and Conservative:

While it's important to set ambitious goals, it's equally crucial to be realistic and conservative in your revenue forecast. Investors and stakeholders appreciate a forecast that demonstrates a clear understanding of potential challenges and uncertainties. Avoid overestimating revenues, as it may lead to unrealistic expectations and undermine your credibility.

Remember that revenue forecasting is both an art and a science. It requires a blend of data analysis, market understanding, and informed decision-making. Be prepared to adjust your forecast as new information becomes available or market dynamics change.

Conclusion:

Forecasting revenues for your business plan requires a systematic and data-driven approach. By understanding your market and customers, utilizing historical data, making key assumptions, employing multiple forecasting methods, accounting for external factors, and continuously monitoring and reviewing your forecast, you can develop realistic revenue projections. Remember, revenue forecasting is an ongoing process that should be regularly updated to align with market changes and business growth. By accurately forecasting revenues, you can make informed strategies, allocate resources effectively, and attract investors and stakeholders who are confident in the potential of your business.

A well-structured and thoughtfully prepared revenue forecast will not only guide your business planning and decision-making but also demonstrate your professionalism and strategic thinking to potential investors. By following the steps and best practices outlined in this guide, you can develop a robust revenue forecast that will support the growth and success of your business. 

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7 Financial Forecasting Methods to Predict Business Performance

• 21 Jun 2022

Much of accounting involves evaluating past performance. Financial results demonstrate business success to both shareholders and the public. Planning and preparing for the future, however, is just as important.

Shareholders must be reassured that a business has been, and will continue to be, successful. This requires financial forecasting.

Here's an overview of how to use pro forma statements to conduct financial forecasting, along with seven methods you can leverage to predict a business's future performance.

What Is Financial Forecasting?

Financial forecasting is predicting a company’s financial future by examining historical performance data, such as revenue, cash flow, expenses, or sales. This involves guesswork and assumptions, as many unforeseen factors can influence business performance.

Financial forecasting is important because it informs business decision-making regarding hiring, budgeting, predicting revenue, and strategic planning . It also helps you maintain a forward-focused mindset.

Each financial forecast plays a major role in determining how much attention is given to individual expense items. For example, if you forecast high-level trends for general planning purposes, you can rely more on broad assumptions than specific details. However, if your forecast is concerned with a business’s future, such as a pending merger or acquisition, it's important to be thorough and detailed.

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Forecasting with Pro Forma Statements

A common type of forecasting in financial accounting involves using pro forma statements . Pro forma statements focus on a business's future reports, which are highly dependent on assumptions made during preparation⁠, such as expected market conditions.

Because the term "pro forma" refers to projections or forecasts, pro forma statements apply to any financial document, including:

• Income statements
• Balance sheets
• Cash flow statements

These statements serve both internal and external purposes. Internally, you can use them for strategic planning. Identifying future revenues and expenses can greatly impact business decisions related to hiring and budgeting. Pro forma statements can also inform endeavors by creating multiple statements and interchanging variables to conduct side-by-side comparisons of potential outcomes.

Externally, pro forma statements can demonstrate the risk of investing in a business. While this is an effective form of forecasting, investors should know that pro forma statements don't typically comply with generally accepted accounting principles (GAAP) . This is because pro forma statements don't include one-time expenses—such as equipment purchases or company relocations—which allows for greater accuracy because those expenses don't reflect a company’s ongoing operations.

7 Financial Forecasting Methods

Pro forma statements are incredibly valuable when forecasting revenue, expenses, and sales. These findings are often further supported by one of seven financial forecasting methods that determine future income and growth rates.

There are two primary categories of forecasting: quantitative and qualitative.

Quantitative Methods

When producing accurate forecasts, business leaders typically turn to quantitative forecasts , or assumptions about the future based on historical data.

1. Percent of Sales

Internal pro forma statements are often created using percent of sales forecasting . This method calculates future metrics of financial line items as a percentage of sales. For example, the cost of goods sold is likely to increase proportionally with sales; therefore, it’s logical to apply the same growth rate estimate to each.

To forecast the percent of sales, examine the percentage of each account’s historical profits related to sales. To calculate this, divide each account by its sales, assuming the numbers will remain steady. For example, if the cost of goods sold has historically been 30 percent of sales, assume that trend will continue.

2. Straight Line

The straight-line method assumes a company's historical growth rate will remain constant. Forecasting future revenue involves multiplying a company’s previous year's revenue by its growth rate. For example, if the previous year's growth rate was 12 percent, straight-line forecasting assumes it'll continue to grow by 12 percent next year.

Although straight-line forecasting is an excellent starting point, it doesn't account for market fluctuations or supply chain issues.

3. Moving Average

Moving average involves taking the average—or weighted average—of previous periods⁠ to forecast the future. This method involves more closely examining a business’s high or low demands, so it’s often beneficial for short-term forecasting. For example, you can use it to forecast next month’s sales by averaging the previous quarter.

Moving average forecasting can help estimate several metrics. While it’s most commonly applied to future stock prices, it’s also used to estimate future revenue.

To calculate a moving average, use the following formula:

A1 + A2 + A3 … / N

Formula breakdown:

A = Average for a period

N = Total number of periods

Using weighted averages to emphasize recent periods can increase the accuracy of moving average forecasts.

4. Simple Linear Regression

Simple linear regression forecasts metrics based on a relationship between two variables⁠: dependent and independent. The dependent variable represents the forecasted amount, while the independent variable is the factor that influences the dependent variable.

The equation for simple linear regression is:

Y ⁠ = Dependent variable⁠ (the forecasted number)

B = Regression line's slope

X = Independent variable

A = Y-intercept

5. Multiple Linear Regression

If two or more variables directly impact a company's performance, business leaders might turn to multiple linear regression . This allows for a more accurate forecast, as it accounts for several variables that ultimately influence performance.

To forecast using multiple linear regression, a linear relationship must exist between the dependent and independent variables. Additionally, the independent variables can’t be so closely correlated that it’s impossible to tell which impacts the dependent variable.

Qualitative Methods

When it comes to forecasting, numbers don't always tell the whole story. There are additional factors that influence performance and can't be quantified. Qualitative forecasting relies on experts’ knowledge and experience to predict performance rather than historical numerical data.

These forecasting methods are often called into question, as they're more subjective than quantitative methods. Yet, they can provide valuable insight into forecasts and account for factors that can’t be predicted using historical data.

6. Delphi Method

The Delphi method of forecasting involves consulting experts who analyze market conditions to predict a company's performance.

A facilitator reaches out to those experts with questionnaires, requesting forecasts of business performance based on their experience and knowledge. The facilitator then compiles their analyses and sends them to other experts for comments. The goal is to continue circulating them until a consensus is reached.

7. Market Research

Market research is essential for organizational planning. It helps business leaders obtain a holistic market view based on competition, fluctuating conditions, and consumer patterns. It’s also critical for startups when historical data isn’t available. New businesses can benefit from financial forecasting because it’s essential for recruiting investors and budgeting during the first few months of operation.

When conducting market research, begin with a hypothesis and determine what methods are needed. Sending out consumer surveys is an excellent way to better understand consumer behavior when you don’t have numerical data to inform decisions.

Improve Your Forecasting Skills

Financial forecasting is never a guarantee, but it’s critical for decision-making. Regardless of your business’s industry or stage, it’s important to maintain a forward-thinking mindset—learning from past patterns is an excellent way to plan for the future.

If you’re interested in further exploring financial forecasting and its role in business, consider taking an online course, such as Financial Accounting , to discover how to use it alongside other financial tools to shape your business.

Do you want to take your financial accounting skills to the next level? Consider enrolling in Financial Accounting —one of three courses comprising our Credential of Readiness (CORe) program —to learn how to use financial principles to inform business decisions. Not sure which course is right for you? Download our free flowchart .

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Run » finance, how to create a financial forecast for a startup business plan.

Financial forecasting allows you to measure the progress of your new business by benchmarking performance against anticipated sales and costs.

When starting a new business, a financial forecast is an important tool for recruiting investors as well as for budgeting for your first months of operating. A financial forecast is used to predict the cash flow necessary to operate the company day-to-day and cover financial liabilities.

Many lenders and investors ask for a financial forecast as part of a business plan; however, with no sales under your belt, it can be tricky to estimate how much money you will need to cover your expenses. Here’s how to begin creating a financial forecast for a new business.

[Read more: Startup 2021: Business Plan Financials ]

Start with a sales forecast

A sales forecast attempts to predict what your monthly sales will be for up to 18 months after launching your business. Creating a sales forecast without any past results is a little difficult. In this case, many entrepreneurs make their predictions using industry trends, market analysis demonstrating the population of potential customers and consumer trends. A sales forecast shows investors and lenders that you have a solid understanding of your target market and a clear vision of who will buy your product or service.

A sales forecast typically breaks down monthly sales by unit and price point. Beyond year two of being in business, the sales forecast can be shown quarterly, instead of monthly. Most financial lenders and investors like to see a three-year sales forecast as part of your startup business plan.

Lower fixed costs mean less risk, which might be theoretical in business schools but are very concrete when you have rent and payroll checks to sign.

Tim Berry, president and founder of Palo Alto Software

Create an expenses budget

An expenses budget forecasts how much you anticipate spending during the first years of operating. This includes both your overhead costs and operating expenses — any financial spending that you anticipate during the course of running your business.

Most experts recommend breaking down your expenses forecast by fixed and variable costs. Fixed costs are things such as rent and payroll, while variable costs change depending on demand and sales — advertising and promotional expenses, for instance. Breaking down costs into these two categories can help you better budget and improve your profitability.

"Lower fixed costs mean less risk, which might be theoretical in business schools but are very concrete when you have rent and payroll checks to sign," Tim Berry, president and founder of Palo Alto Software, told Inc . "Most of your variable costs are in those direct costs that belong in your sales forecast, but there are also some variable expenses, like ads and rebates and such."

Project your break-even point

Together, your expenses budget and sales forecast paints a picture of your profitability. Your break-even projection is the date at which you believe your business will become profitable — when more money is earned than spent. Very few businesses are profitable overnight or even in their first year. Most businesses take two to three years to be profitable, but others take far longer: Tesla , for instance, took 18 years to see its first full-year profit.

Lenders and investors will be interested in your break-even point as a projection of when they can begin to recoup their investment. Likewise, your CFO or operations manager can make better decisions after measuring the company’s results against its forecasts.

[Read more: ​​ Startup 2021: Writing a Business Plan? Here’s How to Do It, Step by Step ]

Develop a cash flow projection

A cash flow statement (or projection, for a new business) shows the flow of dollars moving in and out of the business. This is based on the sales forecast, your balance sheet and other assumptions you’ve used to create your expenses projection.

“If you are starting a new business and do not have these historical financial statements, you start by projecting a cash-flow statement broken down into 12 months,” wrote Inc . The cash flow statement will include projected cash flows from operating, investing and financing your business activities.

Keep in mind that most business plans involve developing specific financial documents: income statements, pro formas and a balance sheet, for instance. These documents may be required by investors or lenders; financial projections can help inform the development of those statements and guide your business as it grows.

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Revenue Forecasting: 3-Step Guide

Revenue forecasting is one of the most powerful tools at your disposal when it comes to financial planning. It helps you set goals, plan for the future, and make smarter decisions about growth.

However, your revenue forecast is only as effective as you make it. That’s why we put together this guide.

We’ll walk you through how to forecast revenue step-by-step. We’ll also give you some tips from CFOs and finance experts to avoid common pitfalls companies make with their revenue forecast.

Table of Contents

What is Revenue Forecasting?

Revenue forecasting is the process of estimating what your revenue will be over a specific time period—typically quarterly or annually—based on your historical and current performance.

For instance, if you want to know how much revenue you’ll generate next month, next quarter, or next year, a revenue forecast will show you where you’re headed at your current pace.

Your forecast is based on your past performance and the current state of your business. It is not a guess! That’s why it’s important to use data to build your forecast, which we’ll dive into a little later.

Revenue Projection vs. Forecast

While some people use the terms “revenue projection” and “revenue forecast” interchangeably, they’re not quite the same thing.

Let’s look at the definition of each, according to the Association of International Certified Professional Accountants (AICPA).

Forecast: “A financial forecast is based on the responsible party’s assumptions reflecting the conditions it expects to exist and the course of action it expects to take.”

Projection: “Prospective financial statements that present, to the best of the responsible party’s knowledge and belief, given one or more hypothetical assumptions, an entity’s expected financial position, results of operations, and cash flows.”

The above excerpts can be found in this document on the AICPA website.

Essentially, the main difference is revenue projections account for hypothetical scenarios that may or may not happen.

Here’s another way to think about it.

A revenue forecast says “this is how much revenue we expect to generate based on our current conditions.”

A revenue projection says “this is how much revenue we project if X happens, and here’s how much we project if Y happens.”

Revenue Forecasting Models

There are a variety of forecasting methods to choose from. Each has its pros and cons depending on your company’s situation.

Bottom-Up Forecasting

Bottom-up forecasting uses product and customer data (drivers) to forecast revenue.

For instance, say you own a monthly subscription box company with multiple pricing tiers. You get customers from Google, influencer marketing, Instagram ads, and email marketing.

With a bottoms-up forecast model, you would analyze the data for each channel and pricing tier, and use that to form your revenue forecast.

Jay Jung , president and founder of Embarc Advisors, recommends a bottom-up model for more accurate forecasts.

“Most companies target a growth rate as a goal. Then they apply a percentage of revenue for other costs and expenses. However, to develop a forecast that is higher in accuracy and aligned with strategic direction, the forecast should be developed bottoms-up based on business drivers e.g., direct response ad spend, or sales team capacity etc.”

Top-Down Forecasting

As the name implies, a top-down forecast is the opposite of the bottoms-up approach. Instead of starting from detailed drivers, you begin with a macro view of your business and industry and work down to revenue.

With this method, you’ll start by looking at the total addressable market for your industry. Next, you’ll calculate your potential market share. Then you’ll use that figure to forecast your potential revenue.

If you’re interested in this approach, Wallstreetprep.com has a free calculator available.

Pipeline Revenue Forecasting

Pipeline revenue forecasting forecasts revenue based on your sales pipeline. You’ll look at the deals you currently have in your pipeline and estimate what percentage of those deals are likely to close.

The accuracy of this method depends almost entirely on how accurate your sales forecast is. If your sales team has a good track record of predicting what percentage of leads they can convert, pipeline revenue forecasting can be pretty effective.

It’s also worth noting that this forecasting method is primarily used by companies with longer sales cycle.

Longer sales cycles allow you to gather data on how well your sales reps perform, how leads react, and other data points you need for accurate forecasting.

So this method could make sense for an enterprise SaaS company with a large average contract value, since those deals typically take a while to close.

However, since a retail store doesn’t generally have a sales pipeline, it probably wouldn’t make sense for them to use pipeline revenue forecasting.

Moving Average

A moving average revenue forecast analyzes trends in your historical performance. Rather than looking at your average revenue growth over the past one or two years, this forecasting method analyzes shorter periods—months or quarters.

An example of when this revenue forecast method is helpful is for seasonal businesses.

For instance, say you’re a company that sells custom Christmas trees, but occasionally offers other holiday-related greenery throughout the rest of the year.

Using the moving average forecasting method, you can look at the ups and downs of your revenue throughout the year and base your forecast on that data.

November and December would likely see big spikes, but periods like August and September might be slower.

Using that information, you can forecast your revenue accordingly and make strategic decisions about managing cash flow , hiring, marketing, and ordering supplies.

This method is also similar to time series revenue forecasting.

Linear Regression

Linear regression is more of an analysis technique than a revenue forecasting method.

It involves analyzing the relationship between two variables to see how they affect revenue. The most commonly cited example of this is sales and profit.

Sales and profit are closely related. In an ideal scenario, profit would grow alongside sales (even if it’s at different rates).

However, when sales are growing but profit is flat or even declining, it could indicate a problem in your growth strategy. You may need to adjust pricing, cost of goods sold , or any number of variables.

Linear regression gives you a starting point to analyze potential issues with your revenue forecast.

Straight-Line

Straight-line forecasting is the simplest model. Straight-line forecasts assume that your revenue will continue to grow at the same rate it has historically.

If your revenue has grown 15% for each of the past two years, the straight-line forecast method assumes that same growth rate for the current year.

While this method is arguably the easiest approach, it may not always be the most accurate. As the saying goes , “past performance is not indicative of future results.”

Meaning that just because you’ve historically achieved a 15% growth rate, you can’t always assume that growth rate won’t drastically change next year.

Still, the straight-line forecasting method gives you a good foundation to build upon.

Why is Revenue Forecasting Important?

There are a ton of benefits to forecasting your revenue.

Just like with financial planning , scenario analysis , and financial modeling , revenue forecasting is all about preparing your company for whatever the future holds so that you’re not caught by surprise and can make the best decisions to grow your business.

Here are a few key reasons why you should forecast revenue.

Build a Realistic Budget

Business finances are similar to personal finances.

With personal finances, you plan your budget based on your income. If you get paid $5,000 per month from your job, you know you can’t afford to spend more than that.

Aside from your fixed expenses (rent, utilities, etc.) you can also budget for things like food, going out, and other variable expenses as long as they’re within your income.

The difference with a business, though, is your revenue is rarely the same each month.

Your future revenue can fluctuate depending on how much you sell, churn , and overall market conditions.

This can make it difficult to budget for operating expenses like marketing or new expenses like hiring employees.

Revenue forecasting helps bridge that gap, particularly for operating expenses . Your forecast gives you an estimate of how much revenue you’ll generate over the next few months, or the entire year. This will allow you to know how much you can budget for marketing campaigns, new hires, software, and other expenses that change over time.

Plan For New Hires

I mentioned new hires above, but it’s worth pulling out into its own section.

Hiring is unique because unlike some other expenses, it usually needs to be planned months in advance and your revenue plays a significant role in your hiring decisions.

When you’re thinking of hiring a new employee, you need to be sure you’ll be able to afford them long term, not just in the moment.

If your revenue forecast shows revenue increasing over the next 12 months, that might give you the assurance that you’ll be able to afford to grow your team.

The opposite is also true though.

If your forecast shows a decline or slowdown in revenue growth, your hiring plan might be more conservative.

Prepare for Investors

If you’re planning to do a fundraising round, or have current investors, they’re going to expect to see a revenue forecast for your business.

Your revenue forecast will allow you to give them numbers based on data, not just what you “hope” to reach. Sure, you might want to bring in $1M in revenue next year, but does your revenue forecast support that?

That’s why a revenue forecast is a must-have when meeting with current and potential investors.

How to Forecast Revenue

Now that we’ve covered some background information and set the stage, let’s dig into how to build a revenue forecast!

Instead of giving you generic tips, though, we’re going to walk through an example revenue forecasting process step-by-step.

We’ll do it using a fictional SaaS company that sells drag-and-drop design software for small businesses.

In this example, I’m the founder and I want to forecast revenue for the next 12 months. Here’s what the process looks like:

NOTE: Your process may look slightly different depending on the forecasting method you choose.

1. Choose a Revenue Forecasting Software/Tool

First, you need a tool to build your revenue forecast. You have a couple of options:

• Spreadsheet
• Dedicated software

A lot of companies use spreadsheets for revenue forecasting. However, there are several downsides to going that route, which we touch on in this article .

When given the choice between complex spreadsheets and a dedicated tool that’s easier to use, I’ll go for the dedicated tool nine times out of ten.

And that’s the case here.

For this example, I’m going to use Finmark to build our revenue forecasting model. Not only is it our own software, but it makes the process extremely simple.

If you want to follow along, or if you just want an easier alternative to spreadsheets, you can try Finmark for free here .

If for some reason you prefer to use a spreadsheet or another tool, you can use the same approach I’m taking here, but the process will be different depending on the tool you’re using.

2. Add Your Products

Since we’re forecasting revenue, we need to make sure all of our products and revenue streams are included in our forecast.

We’ll start with products.

Products are the items you sell. They could be physical products, subscription plans, or whatever else you’re selling.

For our fictional company, our main product is our subscription, which we offer in three different plans:

• Basic – $100/month
• Pro – $250/month
• Premier – $500/month

Let’s add those into Finmark. You’ll just need to fill in the plan name, price, subscription frequency (monthly, quarterly, or annually), and churn rate for the plan.

If you’re unsure of what your churn rate is, check your actuals . If you don’t have the data on-hand, you can estimate. However, we highly recommend using actuals here so your forecast is as accurate as possible.

You’ll repeat the process for all of your individual plans.

Here’s what all of our plans look like once we’ve added them:

If you have non-recurring revenue, you can add that in too.

For instance, let’s say our company also sells templates customers can use with our software. They pay a one-time fee for each template and they can use it as much as they want.

We can add that in as a separate product.

If we sell multiple templates, we can add them all in. So here’s a look at all of our products.

Once you’ve added in all your products, you can move to the next step.

3. Add Your Revenue Streams & Drivers

We have our products added. Now we need to set up revenue streams and drivers for them.

We’ll start with revenue streams.

A revenue stream is the way we make money from the products we added in step two.

We’ll start with our subscription plans. We’ll add a revenue stream called “Monthly Subscriptions” since that’s how we’ll make money from each plan.

We’ll add all three of our subscription plans to this revenue stream.

With those added, we can move onto our revenue drivers.

A revenue driver is what your revenue growth is based on.

If you project you’re going to grow your subscription revenue 5% month over month (MoM), what is that 5% based on?

In Finmark, we give a few options for revenue drivers:

• Base subscribers with monthly growth: Build your forecast based on your expected monthly growth rate. This is a great option, particularly to start out with. You set your initial number of customers and then a projected growth rate for each month.
• Marketing led conversion: Build your revenue forecast based on conversions from marketing campaigns. If you use ads or other paid marketing channels to acquire customers, this is a great option to forecast the revenue you’ll generate from those channels.
• Sales led conversion: Build your forecast based on sales quotas. If you have a sales team, particularly outbound sales with quotas, this method will help you forecast the revenue they’ll drive.
• Custom: Manually build your forecast by entering your projected customer growth for each month. This option is mainly used if you’ve built your model in a spreadsheet and just want to port the data over.

For this guide, we’ll stick with just the base subscribers with the monthly growth option.

It’s the simplest and most straightforward way to forecast revenue. If you want to see how to forecast with marketing and sales led conversions, check out this guide .

To forecast our growth, we’ll just need to input a few details.

• Acquisition start date: What month do we want to start forecasting from?
• Acquisition end date: If there’s a date you expect to stop acquiring leads, you’d enter it here. This is good for time-specific campaigns (i.e. summer sale) or if your revenue growth changes over time due to seasonality.
• Initial customers: How many customers will you acquire on the acquisition start date? This is the base number of customers for your forecast. If you already have existing customers, you can enter those numbers here.

Here’s what we’ve entered for our fictional company.

Lastly, we need to enter our expected monthly growth rate. How much do we expect our customer count to increase each month?

This step is very important. The growth rate you put here should be based on data. On average, how much have you historically grown your customer count MoM?

If you’re a new company and don’t have historical data, you can work backwards based on your revenue and customer goals for the year.

Here’s a rough example of how it might work.

If you have a goal to generate $200K ARR for the year, calculate how many customers you need to acquire in order to reach your goal.

Two-hundred thousand dollars of ARR works out to roughly $16.6K MRR . Now, let’s say you’re currently generating $6K MRR and have 120 customers. You need to add an additional 10.6K in new MRR throughout the rest of the year to reach your goal.

Your average revenue per account (ARPA) is $50 (6000/120). So you need to add about 212 new customers (10.6K/50) to reach your goal of $200K ARR. Based on those numbers, with a growth rate of about 5%, we can reach our goal in 12 months.

That was a lot of math–I know!

Luckily, if you have actuals, you can skip that. You’ll just enter in your historical growth rate (try to stick to your average growth rate from the past 3-6 months) and Finmark will handle all the calculations for you.

Back to our fictional company. We have historicals, and it shows that we’ve grown 8-15% MoM for the past six months. To avoid overestimating our growth, we’ll choose a conservative growth rate of 8%.

Here, we can see what our forecasted number of new customers will be in 12 months. Once we click Add, we’ll be able to see our revenue forecast.

We also need to repeat the same process for our template sales. The key difference is your Revenue Stream type will be One-Time purchases instead of Subscription customers.

And here’s what our total revenue forecast looks like after adding in our forecasted template sales.

Boom! Just like that, we have a complete revenue forecast for our company. You can follow the same steps to forecast your revenue for your business.

The process will be different if you’re using a spreadsheet or another revenue forecasting tool, but the same general concepts apply:

• Add your products
• Add your revenue streams
• Make your assumptions for how much you’ll grow

If you want to build your forecast quickly and easily like in our example, I highly recommend using Finmark .

Bonus: Analyze Your Revenue Forecast

Creating a revenue forecast is great, but turning that data into actionable insights gives you even more value.

Here are a few of my favorite ways to analyze revenue forecasts in Finmark.

Analyze Your Percentage of Forecasted Revenue By Product

Finmark shows you a high-level chart of your revenue by product.

An example of a takeaway we might have from the chart above is our company is heavily reliant on the “PintoBeany” subscription. If that revenue dips, our template sales won’t be able to make up for the losses.

This imaginary company only has two products. But if you have multiple products, this chart becomes even more valuable.

You can quickly see which products are leading your revenue growth and dive deeper when needed.

Analyze Your Revenue Forecast By Product

The next report I recommend using is your forecasted revenue broken down by product.

This table shows the forecasted (and actual) revenue for each product month-over-month.

Seeing exactly how much revenue you’re forecasting for each individual product can be helpful in planning marketing and sales strategies, as well as overall growth planning.

If we decided to invest more into template sales to make the business less reliant on subscription revenue, we can use our current forecast as a baseline.

Then, we can create an alternative scenario that shows how our forecast might change if we ran online ads to promote the templates.

Check out our scenario analysis guide to learn more about that process.

Analyze Forecasted Churn and Growth By Product

If you want to do an even deeper analysis of your revenue forecast, you’ll love our Revenue Details report.

This table is similar to the one above, but it breaks down your  revenue even further by:

• Beginning MRR
• Churned MRR

It also shows how your customer count will change over time by product and subscription plan.

The level of analysis this allows you to do is incredible.

From spotting potential red flags in churn to planning new hires (how many customer support reps will you need based on your forecasted customer growth?) this report gives you plenty of data to work with.

If you’re interested in analyzing your revenue forecast on this level, sign up for a free trial of Finmark here .

Revenue Forecasting Tips & Best Practices

Now that you know how to create a revenue forecast, let’s go over some best practices to make sure your forecast is as useful as possible.

Here are some do’s and don’ts of revenue forecasting.

Base Your Assumptions Off Data

You’ve probably noticed a recurring theme throughout this article—data!

According to Meredith Fennessy , founder and fractional CFO at Le Chéile , “Your revenue forecast is only as accurate as the data you put into it.”

She says that although gathering data may take time, “it is important to ensure it is reliable, so you are confident in making data-backed decisions based on it.”

Making decisions based on an inaccurate forecast can cause devastating damage to your business.

For instance, say you forecast $1M of ARR in 12 months based on inaccurate sales data.

You build your hiring plan with the assumption you’ll reach $1M in ARR. However, it turns out your ARR is only $600K after 12 months because your sales forecast didn’t account for enough ramp time for new sales reps.

If you made new hires and ramped up expenses based on your original $1M forecast, your business will be in a difficult position and you’ll have to make some tough decisions to get back on track.

Long story short, data is your friend!

Don’t Try to Create the “Perfect” Forecast

The perfect forecast doesn’t exist.

Even if you go through every detail with a fine tooth comb, it’s impossible to predict exactly how much revenue you’ll have in three months, yet alone 1-2 years from now.

Between today and three months from now, any number of things can happen.

A new competitor could pop up and disrupt your entire industry. You could see a spike in customers after your product goes viral. Your growth could stay flat for an extended period of time.

The point is, business is dynamic.

Revenue forecasts aren’t meant to be crystal balls that predict your exact future. They’re meant to give you guidance so you can make more informed decisions.

Spending days or weeks trying to forecast every penny you’ll generate next quarter isn’t the best use of your time. Instead, try to get your forecast as accurate as you can, and make adjustments as things change.

Which brings me to my next point…

Update Your Forecast Regularly

Your revenue forecast shouldn’t be something you make at the beginning of the year and leave sitting to collect dust.

As things change in your business, you should update your revenue forecast to reflect the changes.

Jay Jung shared a story with us that explains why updating your forecast is so important.

He once created a forecast for an e-commerce consumer goods company. The forecast was “based on historical trends such as return-on-as-spend (ROAS).”

However, when Apple changed its privacy policies in 2021, “it drastically impacted the company’s ability to effectively administer direct-response ads.”

As a result, the company’s ROAS plummeted, which threw off their previous revenue forecast.

Jung notes, “Even for well-oiled machines, there are always exogenous factors that can significantly impact your business drivers.”

In his case it was Apple’s policy change. But it could also be supply chain disruptions, consumer trends, or other factors within or outside of your control.

To account for these shifts, Jung emphasized the importance of analyzing budget vs. actuals “not just on the P&L statement but also the underlying drivers such as ROAS or Sales Quota Attainment etc. to ensure you are on track with your goals.”

He suggested a quarterly rolling forecast to manage your business in a more agile fashion.

Don’t Create Your Forecast Alone

You don’t have to build your revenue forecast on an island.

In fact, Kimberly Loftis (CFO and current president of Loftis Consulting) says collaboration is vital for accurate forecasting.

According to Lofitis, “The number of departments that impact revenue can differ based on type of business but, at a minimum, both sales and operations should be part of the process.”

Collaboration allows the person driving the forecast to “understand the challenges and opportunities of these departments to forecast accurately,” says Lofitis.

As for the best way to facilitate collaboration, she suggests monthly meetings with department partners to keep abreast of any changes occurring that could impact revenue.

Shameless plug: Our financial planning software makes collaborating on your revenue forecast much easier with shared dashboards, commenting, annotations, and more!

Use Your Forecast to Plan Your Growth Strategy

As I mentioned earlier, your revenue forecast is more than just a report for viewing. You can (and should) use it to plan your growth strategy.

Remember, your forecast shows you where your company is based on your current plan. But what if you want to grow revenue faster? Or maybe you want to measure the impact certain activities will have on revenue growth.

By creating multiple scenarios, you can test plans before putting them into action and see how they’ll affect your revenue growth.

For example, in the screenshot above, we’re looking at a revenue forecast based on two different scenarios:

• Green: This scenario assumes this company will convert more leads
• Orange: This scenario assumes the company will convert an average number of leads

This data can help set goals for what their target conversion rate needs to be in order to meet their revenue goals.

If you want to learn more about how to create, compare, and analyze multiple growth scenarios check out our scenario analysis guide .

Don’t Be Too Conservative (Or Too Aggressive)

When you’re building your revenue forecast, consider whether you’re being too conservative or aggressive with your assumptions.

An overly-aggressive revenue forecast can lead to spending money you don’t have. It also hurts morale when you’re constantly falling short of your forecast.

Believe it or not, an overly-conservative forecast also isn’t great.

If your revenue grows faster than you anticipated, you could find yourself understaffed and/or overworked.

On top of that, if you’re consistently under-forecasting your revenue, you might not be growing as fast as you could.

Here’s why.

Let’s say you forecasted you’d do $1M in annual revenue; but you end up doing $1.5M.

If your forecast would’ve been more accurate, you could’ve planned to hire more people or invested more into marketing campaigns throughout the year, which in turn could’ve boosted your revenue even more.

This is why we always recommend using data as much as possible for your forecast—it’ll give you guidance for your assumptions.

If you know your monthly lead volume, lead conversion rate , marketing spend , and other variables, you’ll be able to build a much more reliable forecast than if you’re just winging it.

There’s nothing wrong with setting aggressive goals for revenue growth, or wanting to prepare for slower or declining revenue, but try to be realistic.

Following the steps we laid out in this guide will help a lot. But it’s also helpful to self-regulate so you know when your forecast seems “off”.

Ready to Build Your Revenue Forecast?

Revenue forecasting doesn’t have to be overly-complicated or so complex that only financial pros can do it.

If you have the right tools and understand how and why your business grows, you can build a revenue forecast that’ll help you project growth, present to investors, and make informed decisions about where to take your company.

And if you want the easiest way to forecast revenue, I highly recommend giving Finmark a try. Not only can you forecast revenue, but you can also create your entire financial plan for your business. Did I mention you can try for free ?

This content is presented “as is,” and is not intended to provide tax, legal or financial advice. Please consult your advisor with any questions.

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The Importance of Revenue Forecasting in 2023

, Chief of Staff, Abacum

13 min read · Published: August 9, 2023

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🎯 Introduction

In today’s competitive business landscape, revenue forecasting plays a crucial role in the success and growth of any organization. By accurately predicting future revenue streams, businesses can make informed decisions, allocate resources effectively, and drive sustainable profitability.

In this article you will explore the importance of revenue forecasting, different forecasting models, a step-by-step guide to building your own model, and answers to common questions surrounding this essential business practice.

Understanding the Importance of Revenue Forecasting

Revenue forecasting plays a vital role in business planning, providing insights into future financial performance and helping organizations set realistic goals. By analyzing historical data, market trends, and other relevant factors, businesses can anticipate their revenue streams, identify potential risks, and optimize their sales strategies. Revenue forecasting serves as the foundation for financial planning, budgeting, and resource allocation, enabling companies to align their operations with their revenue targets.

One of the key reasons why revenue forecasting is crucial for businesses is that it allows them to assess their financial health and plan accordingly. By accurately predicting future revenue streams, organizations can make informed decisions about resource allocation, ensuring that they have the necessary funds to support their operations and growth initiatives. This helps businesses avoid cash flow problems and ensures that they are financially prepared for any challenges that may arise.

In addition to financial planning, revenue forecasting also plays a significant role in strategic decision-making. By understanding their expected revenue, businesses can assess the feasibility of new ventures and determine the potential return on investment. This information is invaluable when it comes to evaluating the viability of expanding into new markets, launching new products or services, or making any other strategic business decisions.

The Role of Revenue Forecasting in Business Planning

Revenue forecasting is an integral part of the business planning process. It helps organizations set achievable revenue targets and develop strategic initiatives to achieve those goals. By utilizing revenue forecasts, businesses can assess the feasibility of new ventures, make informed decisions about resource allocation, and create comprehensive financial projections for investors and stakeholders.

When it comes to setting revenue targets, organizations need to strike a balance between ambition and realism. Revenue forecasts help businesses determine what is achievable based on historical data, market trends, and other relevant factors. This ensures that the targets set are challenging yet attainable, motivating employees and driving the company towards success.

Moreover, revenue forecasting is not just limited to setting targets. It also helps businesses identify potential risks and opportunities. By analyzing historical data and market trends, organizations can identify patterns and make predictions about future revenue streams. This allows them to proactively address any potential challenges and capitalize on emerging opportunities, giving them a competitive edge in the market.

Benefits of Accurate Revenue Forecasting

An accurate revenue forecast provides numerous benefits for businesses of all sizes. By accurately predicting future revenue streams, organizations can optimize their inventory levels, streamline production processes, and adjust their pricing strategies. This ensures that businesses have the right amount of inventory to meet customer demand, minimizing excess inventory costs and avoiding stockouts.

Accurate revenue forecasting also enables businesses to make data-driven decisions about their pricing strategies. By understanding their expected revenue, organizations can assess the impact of different pricing scenarios and determine the optimal pricing strategy to maximize profitability. This helps businesses stay competitive in the market and attract customers while maintaining a healthy profit margin.

Additionally, accurate revenue forecasting allows businesses to identify potential cash flow challenges and take proactive measures to mitigate them. By understanding their expected revenue, organizations can anticipate periods of low cash flow and take steps to manage their expenses or secure additional funding. This helps businesses avoid cash flow problems and ensures that they can continue to operate smoothly even during challenging times.

Furthermore, accurate revenue forecasting enables companies to assess the impact of external factors, such as market conditions or regulatory changes, and make timely adjustments to their sales and marketing strategies. By monitoring market trends and analyzing their revenue forecasts, organizations can identify shifts in customer behavior or market dynamics and adapt their strategies accordingly. This flexibility allows businesses to stay agile and responsive in a rapidly changing business environment.

Exploring Different Revenue Forecasting Models

Various revenue forecasting models can help businesses predict sales and revenue streams more effectively. Each model offers unique insights and can be tailored to suit different industries and business needs.

Let’s explore some popular revenue forecasting models:

1. The Quota Capacity Model

The Quota Capacity Model focuses on the capacity of the sales team to achieve their sales targets. By analyzing historical sales data, individual sales quotas, and overall capacity, organizations can forecast future revenue based on their sales team’s performance. This model helps businesses understand their sales team’s capabilities, prioritize opportunities, and identify areas for improvement.

For example, a software company may use the Quota Capacity Model to assess the performance of its sales team. By analyzing past sales data, they can determine if their sales representatives are consistently meeting their quotas or if there are any patterns of underperformance. This information can help the company identify training needs, adjust sales targets, and allocate resources more effectively.

In addition, the Quota Capacity Model can also help businesses identify potential bottlenecks in their sales process. By analyzing the capacity of the sales team and comparing it to the demand for their product or service, organizations can identify if they have enough resources to meet customer demand. This can inform hiring decisions, expansion plans, and overall business strategy.

2. The ARR Snowball Model

The ARR Snowball Model is commonly used by subscription-based businesses to forecast their recurring revenue growth. It considers factors such as customer churn rate, average revenue per customer, and new customer acquisition. By tracking these metrics, businesses can project their future revenue growth and identify strategies to optimize customer retention and acquisition.

For instance, a subscription-based streaming service may use the ARR Snowball Model to forecast its revenue growth. By analyzing the churn rate (the rate at which customers cancel their subscriptions), the average revenue per customer, and the rate of acquiring new customers, the company can estimate its future revenue streams. This information can help the company develop strategies to reduce customer churn, increase average revenue per customer, and attract new customers through targeted marketing campaigns or product enhancements.

Moreover, the ARR Snowball Model can also assist businesses in identifying potential market opportunities. By analyzing customer acquisition rates and revenue growth in different market segments, organizations can identify which segments are performing well and where there is room for growth. This can guide businesses in allocating resources, targeting specific customer groups, and expanding into new markets.

3. The Sales Cycle to New Bookings Model

The Sales Cycle to New Bookings Model focuses on the sales pipeline and conversion rates at each stage of the sales cycle. By analyzing past performance and conversion rates, organizations can predict future revenue based on their sales pipeline. This model helps sales teams identify potential bottlenecks, optimize their sales processes, and improve forecasting accuracy.

For example, a manufacturing company may use the Sales Cycle to New Bookings Model to forecast its sales pipeline. By analyzing the time it takes for leads to convert into customers at each stage of the sales cycle, the company can estimate the number of new bookings they can expect in the future. This information can help the company identify potential bottlenecks in the sales process, such as long lead times or low conversion rates, and take corrective actions to improve efficiency and increase revenue.

In addition, the Sales Cycle to New Bookings Model can also provide valuable insights into customer behavior and preferences. By analyzing conversion rates and customer feedback at each stage of the sales cycle, organizations can identify patterns and trends that can inform marketing strategies, product development, and customer relationship management. This can lead to more targeted and effective sales efforts, resulting in increased revenue and customer satisfaction.

4. The Bookings, Billings, and Collections Model

The Bookings, Billings, and Collections Model provides a comprehensive view of revenue flow throughout the sales cycle. It considers factors such as bookings (orders placed), billings (invoices issued), and collections (cash collected). By tracking these metrics, businesses can anticipate their cash flow and identify potential gaps or delays in revenue collection.

For instance, a consulting firm may use the Bookings, Billings, and Collections Model to track its revenue flow. By analyzing the number of bookings (client engagements), the amount invoiced (billings), and the cash collected (collections), the firm can monitor its cash flow and identify any discrepancies or delays in payment. This information can help the firm manage its financial resources more effectively, negotiate payment terms with clients, and plan for future expenses.

Moreover, the Bookings, Billings, and Collections Model can also help businesses identify areas for process improvement. By analyzing the time it takes for bookings to turn into billings and collections, organizations can identify potential bottlenecks in their invoicing and payment processes. This can lead to streamlined operations, reduced payment delays, and improved cash flow management.

Step-by-Step Guide to Building a Revenue Forecasting Model

Building a revenue forecasting model requires careful analysis of historical data, market trends, and relevant business factors.

By following these steps, you can create an accurate revenue forecast for your organization:

Creating Assumptions for Customer Growth and Average ARR

To begin, assess your historical customer growth rate and average Annual Recurring Revenue (ARR). Utilize market research, industry benchmarks, and internal data to make informed assumptions about future customer growth and ARR. These assumptions will form the basis of your revenue forecast.

When analyzing historical customer growth, consider factors such as marketing efforts, customer acquisition strategies, and market conditions. Look for patterns and trends that can help you identify potential growth opportunities or challenges.

Additionally, when determining the average ARR, take into account pricing strategies, product enhancements, and customer feedback. Analyze how these factors have influenced the average revenue generated per customer over time.

By thoroughly understanding your customer growth and average ARR, you can make more accurate assumptions for your revenue forecast, which will ultimately help you make informed business decisions.

Learn more:

Calculating Net New Bookings for Accurate Revenue Projection

Next, calculate your Net New Bookings by considering new customer acquisition and upselling opportunities. Incorporate factors such as conversion rates, pricing changes, and market trends to estimate your future bookings accurately. This step will help you project your revenue streams in a realistic and achievable manner.

When analyzing new customer acquisition, evaluate your marketing and sales strategies. Identify the channels that have been most successful in attracting new customers and assess the effectiveness of your lead generation efforts. Consider the conversion rates at each stage of the sales funnel to estimate the number of new customers you can expect in the future.

Furthermore, when evaluating upselling opportunities, analyze customer behavior and purchasing patterns. Look for cross-selling or upselling opportunities within your existing customer base and determine the potential revenue impact of these strategies.

By incorporating these factors into your revenue projection, you can gain a more comprehensive understanding of your future revenue streams and make strategic decisions to drive growth.

Modeling Renewal Bookings for Revenue Continuity

Renewal bookings are crucial for maintaining revenue continuity in subscription-based businesses. Assess your historical renewal rates, customer satisfaction levels, and contract terms to model your future renewal bookings. By factoring in potential churn and renewal rates, you can accurately forecast your revenue streams and understand the impact of customer retention on your organization.

When analyzing historical renewal rates, consider the reasons why customers choose to renew or not renew their subscriptions. Look for patterns or commonalities among customers who have renewed and those who have churned. This analysis can help you identify areas for improvement and develop strategies to increase customer retention.

Additionally, evaluate customer satisfaction levels through surveys, feedback, and support interactions. Identify areas where you can enhance the customer experience and address any pain points that may contribute to customer churn.

By modeling your renewal bookings based on these factors, you can gain insights into the future revenue continuity of your business and implement strategies to improve customer retention.

Calculating Billings and Collections for Cash Flow Analysis

Lastly, calculate your billings and collections to analyze your cash flow. Consider factors such as payment terms, invoicing accuracy, and collection efficiency to forecast your cash flow accurately. By understanding your cash flow dynamics, you can proactively address potential challenges and optimize your financial operations.

When analyzing payment terms, assess the average time it takes for customers to pay their invoices. Consider any seasonal or industry-specific factors that may affect payment timelines. This analysis will help you estimate the timing of your cash inflows and outflows.

In terms of invoicing accuracy, evaluate your billing processes to ensure that invoices are generated correctly and promptly. Identify any bottlenecks or inefficiencies that may delay the invoicing process and impact your cash flow.

Furthermore, when assessing collection efficiency, analyze your collection practices and policies. Identify any overdue accounts or potential risks of non-payment. Develop strategies to improve collection rates and minimize the impact of late payments on your cash flow.

By accurately calculating your billings and collections, you can gain a deeper understanding of your cash flow dynamics and make informed decisions to optimize your financial operations.

Taking Top-Line Planning to the Next Level

Revenue forecasting is a crucial aspect of understanding a business’s financial performance. It allows organizations to anticipate future revenue streams, identify potential challenges, and make informed decisions. However, to truly maximize the benefits of revenue forecasting, businesses can take their top-line planning to the next level by integrating it with other planning processes.

• One key area where integration can be immensely valuable is aligning revenue forecasts with operational plans. By connecting revenue projections with operational strategies, businesses can ensure that their resources and capabilities are aligned with their revenue goals. This alignment enables organizations to optimize their overall performance and drive sustainable growth.
• Another critical aspect of taking top-line planning to the next level is integrating revenue forecasting with marketing strategies. By understanding the projected revenue streams, businesses can tailor their marketing efforts to target specific customer segments, optimize pricing strategies, and identify opportunities for growth. This integration allows organizations to create a cohesive and effective marketing plan that aligns with their revenue goals.

Furthermore, integrating revenue forecasting with financial goals is essential for effective top-line planning. By aligning revenue projections with financial targets, businesses can better manage cash flows, plan investments, and make strategic financial decisions. This integration ensures that financial resources are allocated efficiently and effectively, maximizing the chances of achieving desired financial outcomes.

While integration is crucial, leveraging advanced analytics, predictive technologies, and real-time data can further enhance the accuracy and agility of revenue forecasting. Advanced analytics tools can analyze historical data, market trends, and customer behavior to generate more accurate revenue forecasts. Predictive technologies can help businesses anticipate future revenue streams based on various scenarios and assumptions. Real-time data integration allows organizations to monitor revenue performance continuously, identify deviations from forecasts, and make timely adjustments.

In conclusion, while revenue forecasting provides valuable insights into a business’s financial performance. It acts as a guide, enabling the prediction of future revenue streams, anticipating potential challenges, and supporting well-informed decision-making.

However, the true power of revenue forecasting emerges when it seamlessly integrates with other essential planning aspects. This is precisely where a solution like Abacum comes into play.

Abacum FP&A software empowers to discern what’s effective, what’s not, and how to take actionable steps to achieve desired outcomes. Connect with an Abacum FP&A consultant today to kickstart the conversation.

Answers to Common Revenue Forecasting Questions

How does excel’s suite of data analysis tools.

Excel is a widely used tool for revenue forecasting but when it comes to revenue forecasting, accuracy is key. Excel offers various data analysis tools that can help businesses make more informed projections. These tools include regression analysis, moving averages, and exponential smoothing. By leveraging these tools, businesses can analyze historical data, identify trends, and make predictions based on patterns.

In what ways can businesses leverage Excel’s formula optimization and custom formula creation capabilities?

Formula optimization is another important aspect of forecasting in Excel. By using the right formulas and functions, businesses can automate calculations and save time. Excel provides a wide range of formulas that can be used for revenue forecasting, such as SUM, AVERAGE, and IF, that can be used to perform complex calculations. Additionally, businesses can create custom formulas to suit their specific forecasting needs.

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Best cash flow forecasting software tools for fp&a teams in 2023, spend 75% less time on manual tasks with abacum.

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The Revenue Forecasting Guide and Best Forecasting Models

What is Revenue Forecasting?

Why is revenue forecasting important, create a realistic financial plan, anticipate a ramp-up in hires, the top 4 forecasting methods, straight-line forecasting method, moving average forecasting method, simple linear regression forecasting method, multiple linear regression forecasting method, the do’s and don’ts of revenue forecasting, do use data for your assumptions, don’t try to design the “ideal” forecast, do update your forecast frequently, don’t create your forecast all by yourself.

It all boils down to your business when it comes to revenue projections. Not only the future of your company but also the precise location, industry, and services you ultimately offer customers. You must create revenue predictions to evaluate your business's status going forward to establish an accurate budget equivalent to your company's annual strategy.

Revenue forecasting is the process of estimating future revenue based on past performance and current trends. Forecasting is necessary for any business plan because it provides direction for decision-making, including budgeting and resource allocation. Without accurate revenue projections, it would be difficult to make informed decisions about where to allocate resources to achieve desired. A revenue forecast, for example, might highlight where you're going at your current rate if you want to know how much money you'll make next month, quarter, or year.

Revenue forecasting is an essential tool for all businesses, regardless of size or industry.

There are several advantages to predicting your revenue. Revenue forecasting is all about putting your company in a position to face whatever the future may bring so that you're not caught off guard and can make the most informed decisions possible to develop your business.

Here are a few major reasons to forecast revenue.

Personal and business finances are both concerned with managing your money. Personal finance involves creating a budget based on your income. You know you can't spend more than $5,000 every month if you get paid $5,000 per month from your job. You can budget for everything from food to going out and other variable expenses as long as they are within your means.

However, a company's revenue is seldom consistent each month. Your income can vary depending on how much you sell, whether or not you have churning customers—if you're a subscription firm, and market conditions. It's tough to plan for daily operations like marketing or new expenditures like recruiting employees when you're not sure how much money you'll have coming in.

Forecasting allows you to bridge the gap between your projections and reality, particularly for operating costs. Your forecast provides a prediction of how much money you'll make in the following few months or years. This will help you forecast how much money you can set aside for marketing efforts, new employees, software purchases, and other spending that fluctuates over time.

I've already gone over new employees in the previous section, but it's worth mentioning it here. Hiring is distinctive because, unlike many other costs, it usually needs to be planned several months ahead, and your revenue significantly impacts your hiring choices.

When recruiting a new employee, you need to be sure that you'll be able to afford them long-term, not just in the near term. If your revenue forecast shows growth over the next year, you may feel more confident in being able to add members to your team.

While both are true, they aren't the whole picture. If your revenue projections drop or slow down, you may need to scale back on employee growth.

Discover both concepts, their importances and limitations as well as similarities and differences

The most common techniques financial analysts use to forecast a firm's future revenues, costs, and capital expenses are straight-line, moving average, simple linear regression, and multiple linear regression. While there are many different quantitative budget forecasting tools in use today, we'll focus on the top four methods: (1) straight line, (2) moving average, (3) simple linear regression," and (4) multiple linear regression.

When the growth rate remains consistent, this approach is frequently employed to get a simple picture of constant expansion at the same rate. It only uses basic arithmetic and past statistics. Ultimately, it gives predictions for future development that may help you with financial and budget goals.

An Example of Straight-Line Financial Forecasting

The growth rate of a restaurant chain has remained stable at 5% over the past three years. The business expects its expansion rate to continue at that level for the next two years. By adding 5% to this year's growth and 5% to the following year's and recording those results as the preceding year's growth plus one, the company may make reliable predictions about how many new workers it will need to hire in each of those years and how much additional payroll money they will require.

A moving average is a form of trend analysis that compares the current performance in shorter time periods to that of previous periods. It isn't utilized over longer durations, such as years, because it creates too much lag to be helpful in trend following.

Using this technique, an average of variables with significant movement, like stock prices, and values with frequent but slower changes, such as inventory levels during peak retail seasons, can be continuously updated.

In a nutshell, this strategy is used to look for underlying patterns that can be used to evaluate common financial measures such as revenues, earnings, sales growth, and stock prices. A downtrend is indicated by a dropping moving average, and a rising moving average shows an uptrend.

An Example of Moving Average Financial Forecasting

A retailer wants to figure out how much product if any, he needs to reorder from a wholesaler. Sales are doing well overall because it is the holiday season, but he needs to know which goods are rising in popularity. He produces a moving average for the week to tell him the trend and guide his inventory buy orders rather than trying to watch irregular upticks and declines in a particular product's sales each day or over a week.

The connection between a dependent and an independent variable is utilized to draw a trend line. An analysis using linear regression connects changes in an explanatory variable on the X-axis to changes in a dependent variable on the Y-axis. The relationship between the X and Y variables generates a graph line representing a trend that often swings upward or downward or remains stable.

An Example of Simple Linear Regression Financial Forecasting

Two factors crucial to every firm's success are sales and profits. If the trend line for sales (x-axis) and profits (y-axis) rises when used with simple linear regression, then everything is fine for the firm, and margins are robust. If sales are up while profits are down, something is wrong; perhaps there are increasing supply costs or tight margins. Despite this, if sales are down but profits are up, the product's value rises. This indicates that company costs/expenses have decreased and that the linear regression model is functioning well—when profits rise, margins improve as a percentage.

This method makes a forecast using more than two distinct variables. A model of the relationship between the main explanatory variables (parameters) and the dependent response variable is essentially created using much linear regression (MLR) (outcome).

An Example of Multiple Linear Regression

A trucking company executive wants to forecast gasoline prices for the following six months. The EIA Gasoline and Diesel Fuel Update, oil futures from a futures exchange, mileage from GPS fleet routing systems, traffic patterns from smart city open data platforms, and the number of trucks the company anticipates will be on the road during the period based on delivery orders are the independent variables used for this method. This list is provided for illustration reasons only; other factors may also impact the outcome.

In each scenario, all of the variables not only affect the outcome but are also independent of it. Based on the factors, this model makes predictions about the result, in this example, the anticipated gasoline prices for the time period.

Google Sheets FORECAST Function (+ Examples)

The Google Sheets FORECAST function predicts future values based on your data. Here’s how to use the FORECAST function step-by-step, with examples.

Let's look at some best practices for creating an accurate revenue forecast. Here are some dos and don'ts for revenue forecasting.

Data has probably been a recurring pattern in this article. Many entrepreneurs make the error of basing their income predictions on their most optimistic assumptions. The issue with that is that it may cause you to grossly overstate your sales figures, which might be disastrous for your company.

Making decisions based on those projections is just slightly worse than overestimating your revenue. Data is your friend!

There is no flawless forecast. It's impossible to anticipate precisely how much revenue you'll have in three months, let alone 1-2 years from now, even if you go over every detail with a fine-tooth comb.

Anything could happen between now and three months from now. Your entire industry could be affected by the emergence of a new rival. If your product becomes popular, you can experience an increase in sales. You run the risk of having prolonged flat growth. The idea is that commerce is fluid.

Revenue projections aren't intended to be accurate future forecasts. They're designed to provide you with direction so you can decide more wisely.

It is not the best use of your time to attempt to forecast every cent you make during the upcoming quarter over days or weeks. Instead, make every effort to make your prognosis as accurate as possible and then make changes as necessary.

The revenue prediction you create at the beginning of the year shouldn't be abandoned to gather dust.

You should adjust your revenue prediction as circumstances in your company change.

For example, your original prediction may have anticipated the execution of 3–4 targeted marketing efforts throughout the year. However, after conducting two, you might alter based on the outcomes. Your revenue prediction will be affected by anything, including trying a new channel, improving the conversion of your advertising, and lowering your performance goals.

Your business model will determine how frequently you should update your revenue forecast. While a more established business might revise its projection every three months, an early-stage startup conducting extensive testing to learn the ropes might need to make revisions every month.

The most crucial thing is to avoid treating your revenue prediction as a static record. It can be a helpful tool for progress if you frequently monitor and analyze it.

Revenue forecasting includes input from several people unless you're a one-person company.

You can learn about marketing's upcoming initiatives from them to generate leads and sales. You may learn more about the funnel and sales velocity from sales. You can get advice and information from everyone active in bringing in and keeping customers. If you're not as "in the weeds" with sales and marketing on a daily basis, this can be useful.

Consti met co-founder Moritz at Helpling. Both heavy spreadsheet users, they decided to channel their frustrations with Excel and Google Sheets into a solution. Teaming up with Ernests, they launched Layer.

Layer is now Sheetgo

Automate your procesess on top of spreadsheets.

Revenue Forecasting & Planning Guide: 4 Models For Planning Your Top Line

Steve Groccia

Head of Customer Operations

Ask any finance leader what their toughest responsibilities are, and you’ll inevitably hear revenue forecasting near the top of the list.

No matter how many years of experience you have, each organization comes with unique inputs, processes, and source systems that make top-line forecasting a bespoke, often painful, part of business planning.

But it’s critical that finance pushes through the sleepless nights and headaches to nail down an accurate revenue forecast. Your company lives and dies by its ability to hit growth targets and revenue projections . And your top-line forecasts tie directly into your SaaS valuation  as VCs look to understand the trajectory of your business.

While revenue forecasting is a highly-customized process for each business, there are still certain principles, approaches, and best practices that every finance team  should understand. Here’s what you need to know to plan your top line (and make revenue forecasting a pain-free process with Mosaic).

Table of Contents

What Is Revenue Forecasting?

Revenue forecasting is the first step of any planning process in which you project future top-line growth with driver-based forecasting and assumptions that are most relevant to your business model.

An effective revenue forecast sets the stage for an entire budgeting cycle. It’s what aligns the entire business with growth goals, creates the foundation for each department’s budget, and sets the stage for informed decision-making.

There are multiple ways to model your top line. But before you worry about the nuts and bolts of modeling, you have to approach revenue forecasting as a project manager. There are three things to think about before you actually start the process of revenue planning:

• Timing. You’ll revisit your top-line plan consistently throughout the year. But the primary process ties directly to your annual planning cycle. For companies that end the year in December, you should be kicking off the revenue forecasting process in October, just after completing Q3. You have an idea of how the year will close out, and you can use that projected information to launch planning conversations about realistic/unrealistic growth.
• Philosophy. Are you a hyper-collaborative organization, or do plans take a more top-down path in your organization? If you’re going to frequently meet with department leaders, build that into your timeline because those conversations could extend the planning process. If your company is more direct with revenue expectations, you can have more streamlined talks with your salespeople to build the plan.
• Stakeholders. Prioritize alignment across necessary stakeholders as early as possible. What sales ops sees as the key drivers may not be the same as what the sales leader thinks — which may not be the same as what finance believes. The sooner you align with stakeholders on the approach to revenue planning, the smoother the process will be.

These pre-planning fundamentals are what could make the difference between revenue forecasts that inform an efficient, aligned growth plan vs. ones that miss the mark (setting your company back in the process).

Why Is Revenue Forecasting Important?

Revenue forecasting is important because it provides a concrete overview of your company’s growth path and allows you to make relevant business decisions . Revenue equals customers, customers inform hiring and product development, new customers and renewals equate to cash flow, and cash is the lifeblood of any business. So, your ability to accurately forecast and project revenue is critical to planning.

There are ripple effects of the revenue planning process that go beyond just projecting top-line momentum. Strong top-line planning also helps you:

• Verify the headcount plan . Headcount is typically the biggest expense for a small business (especially for SaaS companies). That’s why modeling out your headcount plan is just as crucial as your revenue plan. But without accurate forecasting, you risk having to push out staffing plans, which in turn sets product development back and prevents you from meeting your growth potential.
• Push the limits of customer acquisition costs . For earlier-stage startups, growth at all costs is almost essential as you fight to capture as much market share as possible. Accurate revenue forecasts give you a better idea of acceptable acquisition costs and give your marketing and sales teams more realistic budgets to attack the market opportunity.
• Build trust with investors. Presenting inaccurate revenue forecasts in your board deck quarter after quarter will erode trust. Instead of getting to tap into the strategic value of your board, you’ll spend entire board meetings trying to explain why your company can’t effectively map out its growth path. Maintaining clean, consistent revenue forecasts creates a foundation of trust between you and your investors.

Finance teams only unlock these advantages when they come up with the best possible approach to revenue planning for their organizations — and that starts with choosing the right model.

4 Revenue Forecasting Models to Plan Your Top Line

You’ll never find a one-size-fits-all financial model template  for top-line planning. But there are a few broad categories of revenue forecasting methods that you can adapt to your needs.

The following 4 revenue forecasting models cover both sides of the top-down vs. bottom-up budgeting  conversation, giving you an opportunity to triangulate results and ensure accuracy.

1. The Quota Capacity Model for Sales Forecasting

A sales capacity model (or a quota capacity model) is a bottom-up revenue forecasting method that uses historical data points for sales rep performance and ramp times to forecast future top-line growth.

Sales capacity models are effective for companies with sales-heavy go-to-market motions and a decent foundation of historical data. As long as your CRM setup  is clean, you’ll be able to build out an accurate sales ramp  waterfall that drives bookings projections based on your sales headcount plan.

In addition to your sales headcount plan and ramp rate, this model uses quota attainment for both ramping and ramped AEs to generate outputs for new bookings, billing, revenue, and collections.

Get started with a quota capacity model template

2. the arr snowball model.

The ARR snowball model is another popular method for SaaS revenue forecasting . It uses trends in ARR data to project future revenue growth, broken out into new ARR, upgrade ARR, downgrade ARR, and churned ARR.

Unlike a sales capacity model, earlier-stage companies can build out an ARR snowball without having the most granular historical data. Rather than needing deep insight into sales ramp rates and performance, you only need to see a recent trend in revenue growth to project next month, next quarter, next year, and beyond.

A sales capacity model is the truest form of a bottom-up approach to planning. The ARR snowball, on the other hand, is more of a blend of bottom-up and top-down. It leans on assumptions for things like seasonality, new customers, and average annual contract value  to drive revenue outputs. However, it’s not as deeply dependent on departmental collaboration as true bottom-up models.

Download an ARR snowball model template from our finance experts

3. the sales cycle to new bookings model.

The sales cycle to new bookings revenue forecasting method uses trends in sales cycle data to determine how many leads you need to generate to hit your business goals. Historical trends in opportunities created, deal conversion rates , days to close, and average bookings amounts help you create assumptions for new business in the coming months.

For a company that doesn’t have a large, mature sales function, this may be an easier approach to top-line planning than the sales capacity model. It’s also a simple way to sense-check your numbers if you primarily use a sales capacity model or an ARR snowball model to plan revenue.

4. The Bookings, Billings, and Collections Model

This simple top-down revenue forecasting model uses new customer counts and average revenue per customer to forecast net new bookings. Using historical net retention rates, you can forecast renewal bookings, billings, and collections.

Unlike the sales capacity model and ARR snowball model, this approach to revenue forecasting makes broader assumptions about business growth to model out high-level company goals.

The main advantage of this type of model is that finance can build it without much input from the rest of the business, speeding up the early stages of the planning process. As long as you can come up with a 3-month average ARR per customer and a 12-month average for net revenue retention , you can generate revenue predictions for your business.

(We’ll use this approach for our walkthrough of how to build a revenue forecasting model.)

How to Build a Revenue Forecasting Model in Mosaic

Just because Excel and Sheets are flexible enough to handle the highly-customized nature of top-line planning doesn’t mean they’re the best tools for the job.

The amount of time and effort you have to put into pulling data from source systems, updating complex webs of financial assumptions , and revising models based on ad hoc requests takes away from the strategic work you should be spending more time on.

Mosaic’s Topline Planner gives finance teams a blend of both worlds — the flexibility of spreadsheets with the real-time data necessary to plan at the pace of a high-growth company. Our new Topline Planner enables you to quickly build and maintain custom revenue forecasts using elements that are unique to your business. The cloud-based grid combines on-demand metrics with intuitive formulas to create a seamless modeling experience.

You can build out any of the revenue forecasting models listed above within the Mosaic platform. Here’s a walkthrough of the SaaS bookings , billings, and collections model to give you an idea of how it works.

Create Assumptions for Customer Count Growth and Average ARR Per Customer

This revenue forecasting model starts with projecting net new bookings based on new customer growth and average ARR per customer.

Start by creating a row in Mosaic that pulls in the Customer Count metric from your actuals. Then, forecast growth using the 3-month average and apply it forward over the forecast time period.

Then, you can create another new row that uses Average ARR per Customer as the actuals definition. If you plan to increase your average ARR over time, apply that growth rate. For example, you could use a per-month forecast method and assume ARR per Customer will grow 5% every 12 months.

Calculate Net New Bookings Based on Your Assumptions

Before you can calculate SaaS bookings, you need to know the change in customer count month-over-month. Add a line item to your top-line model that dynamically calculates customer changes using the formula method in Mosaic.

Now, create another row for Net New Bookings (ARR). Forecast this metric by multiplying Average ARR per Customer by Customer changes.

The result is an output of bookings for the new customers you expect to sign in each month during your forecast.

Model Your Renewal Bookings

The particular calculations in this step will depend on your business model. But for the example, let’s assume you have annual contracts that renew each year.

Add a Net Dollar Retention row, pulling in retention data for a 12-month lookback period that considers upsells, downsells, and churn. Use the per-month forecast method to forecast net dollar retention.

Add a placeholder row for Renewal Bookings that pulls in your bookings actuals. Then, add another row for Total Bookings that adds new and renewal bookings.

Go back to your Renewal Bookings row and forecast with a formula that accounts for your 12-month renewal cycle and calculates based on your average retention rate.

Calculate Billings and Collections

Once you’ve modeled net new and renewal bookings, you can build out calculations for billings and collections. Assume you bill your customers in the same month you book your deals. In that case, your billings forecast would be equal to your Total Bookings ARR line.

Then, build out assumptions for your collections schedule. A basic assumption might be that you’ll collect 75% on a Net 30 basis, another 20% two months later, and lose 5% of bookings as uncollectible.

Once you’ve finished modeling out your collections, you have a complete top-line model for the top-down scenario.

To check your forecast accuracy, you could also build out an ARR snowball or a sales capacity model to verify the numbers from a bottom-up perspective.

Create the Most Accurate Revenue Forecasts with Strategic Finance Software

It’s time to take top-line planning beyond the spreadsheet.

Finance teams don’t have time to fight against complex spreadsheets and point system data pulls to nail down their revenue forecasts. We believe revenue planning should be a simpler process, which is why we’re thrilled to release our Topline Planner.

When you use Mosaic for revenue forecasting, you can maximize speed and precision with:

• Direct connections to the metrics catalog. Access the full library of on-demand financial metrics  to accelerate modeling with real-time actuals.
• Intuitive formulas. Quickly create formulas with the help of a function library that has auto-complete features.
• Sheet-like formatting. Leverage the flexibility of spreadsheets with our dynamic grid, which lets you modify cells, copy/paste, and add rows with just a few clicks.
• Metric cross-reference. Connect top-line data to your income statement, balance sheet, and headcount planners for more dynamic forecasting and flexible budgeting processes.
• Simple scenario planning . Use scenario planning software to duplicate models and tweak assumptions to quickly sensitize your plans and see how different scenarios impact the business.
• One-click goal setup. Set forecasted topline metrics as goals and quickly access them in the Analysis Canvas dashboards to track your historical performance.

Want to learn more about how Mosaic takes the pain out of the typical high-stress top-line planning process? Reach out for a personalized demo  and find out how you can forecast revenue with ease.

Revenue Forecasting FAQs

How do you forecast revenue in excel.

Excel has a feature called “ Forecast Sheet ,” which allows you to create a forecast based on values corresponding with your date range. Based on these values over time, Excel will create a customizable revenue forecast. But more often than not, forecasting revenue in Excel means creating the right set of assumptions for projected performance and building formulas to calculate future revenue.

Unfortunately, the practicality of using Excel to project top-line growth is limited due to the need for manual revision of financial forecasting models and the lack of real-time data (which is why  financial forecasting software can be particularly valuable).

How do you forecast revenue in Google Sheets?

Google Sheets has a “ FORECAST ” formula to forecast revenue that can help create the most basic top-line projections. The forecast uses the total revenue of previous months to forecast the next month’s revenue, but it is limited in customizability and requires a lot of manual revision. Instead, forecasting revenue typically means creating the right set of assumptions and building out the formula logic to project future performance. Unlike other forecasting tools, Sheets does not deliver real-time data.

What is top line forecasting?

Top line forecasting, also known as revenue forecasting, is the process of modeling or predicting future revenue from sales of products and/or services. It’s important to know the difference between top line vs. bottom line growth .

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How to forecast revenue: A guide to boosting your business’s growth

If you plan to apply for a small business loan , you’ll need to prepare a detailed revenue forecast before lenders will consider your request. This type of report will also provide some much-needed information that will help you know when you can afford to hire an employee, launch a marketing campaign, or expand your operations. 

Revenue forecasts are useful both for startups and existing businesses. We’ll cover what a revenue forecast is, how to prepare one, and best practices to follow.

What is revenue forecasting?

• Benefits of forecasting revenue
• Types of revenue forecasting
• How to forecast revenue
• Forecasting best practices

Revenue forecasting is the process of using existing data and metrics to predict your business’s future revenue. This includes using historical and current financial data to determine what the upcoming revenue could be in a given period (monthly, quarterly, or annually).

Benefits of forecasting revenue 

The main benefit of forecasting revenue is the ability to plan and make financially viable decisions. If business expansion is in your future plans, forecasting revenue can help with decisions regarding:

• Staffing and hiring: Forecasting revenue gives you a more accurate view of whether you can afford to hire and expand your staff. 
• New market expansion: Forecasting revenue with new market expansion in mind allows you to estimate how much more you could be earning in an additional market.
• Removes guesswork: Forecasting revenue helps you make better decisions based on your current and future expenses to make it more accurate.

4 revenue forecasting methods 

There are four commonly used methods to make accurate revenue predictions for your business, including:

• Moving average forecasting
• Straight-line forecasting
• Time series forecasting
• Linear regression forecasting

These methods share similarities, like the ability to compute results within Excel or Google Sheets and the use of historical data to draw final conclusions. They also hold their distinguishing features like using averages, statistics and external factors to influence the results.  

1. Moving average forecast  

The moving average forecast uses an average of a group of numbers to determine trends within your revenue data.

• For example, taking any revenue historical data set and using the average of the previous year’s data can give you a projection of revenue to come. 

2. Straight-line forecast 

The straight-line method uses past growth rates to lay the framework for future predictions of revenue growth. It’s arguably the easiest to compute since it requires the most basic math.

• For example, look at the average growth rate for the past year and use it as a prediction for what the current year and future years will look like.  

3. Time series forecast

Time series forecasting uses existing data to focus on how external trends affect revenue growth.

• For example, a time series forecast looks at the existing data and identifies patterns that could be repeated in the future, like seasonality.  

  4. Linear regression forecast 

Linear regression forecasting uses predictive analysis to show the relationship between data points graphed on a plot line. It's used to make a trend line that shows the growth or decline of revenue based on a data set.

• For example, if you plotted out your revenue for the past 12 months, a trend line could be used to confirm an upward or downward trend between the points.

How to forecast revenue in 5 steps

Revenue forecasting should be performed as a step-by-step process. Below, we’ve included a system that will help you achieve the most accurate revenue forecast for your business. The steps include:

• Deciding on a timeline
• Forecasting your expenses
• Forecasting your sales
• Calculating your prediction
• Repeating the process 

1. Decide on a timeline

Before forecasting your revenue, you’ll need to decide how far into the future you want to look. This will be determined by your specific goals. For instance, if you want to determine whether you can add a second location in two years, then you’ll calculate a two-year forecast. 

However, keep in mind that the further into the future you plan, the more you should expect a degree of error. This is a result of unseen internal and external forces that may arise.   

2. Forecast your expenses 

To forecast your expenses, refer to your past expense records or research expenses for your industry if you’re a startup. You’ll need to calculate two types of expenses:

• Fixed costs: These are expenses that remain the same every month. They include rent, fixed salaries, utilities, insurance, phone, internet, technology, postage, advertising, marketing, legal, accounting, and bookkeeping expenses.
• Variable costs: These are expenses that can change every month, but taking an average will give you a baseline to run with. They include the cost of goods sold (including materials and supplies), packaging costs, sales, cost of labor, marketing, and customer service costs as they directly relate to the sale of your product.

3. Forecast your sales  

If you own an existing business, look at your past sales figures and then consider the following factors to make an educated guess about future sales on a month-by-month basis:

• Your customers: Identify your customer base and determine which customers you’ll include in the forecast. Remember, common wisdom says that you’ll get 80% of your business from 20% of your customers.
• Your service area: Do you have plans for expansion? If so, include your current geographical area as well as the area you plan to include in the future.
• Market conditions: What is the state of the market? Will it remain steady or increase?
• Business position: Consider the position of your business within your industry and factor in your growth expectations.
• Seasonal adjustments: Many businesses have increased or decreased sales in a seasonal cycle. If your business falls into that pattern, take this into consideration.

If you own a startup and don’t have historical records to work from, forecasting your revenue may take some extra work. It will take meticulous research on your part, and the outcome should be based on this research rather than guesswork. Here are some good sources of information:

• Look at the most recent consumer spending habits in the Consumer Expenditure Report from the Bureau of Labor Statistics (BLS) to see how in demand your products or services are.
• Find detailed information about your industry on the BLS’s Industries at a Glance page .
• Check the most recent Producer Price Index to determine price stability for your industry.

4. Calculate your prediction

Next, you’ll take all of your research and mold it into a prediction for your future sales. If you offer more than one product or service, you should do this for each of those areas and then combine them for a total figure. Here’s how to arrive at that figure:

• Determine how sales are calculated for your industry: For example, if you own a service-based business, sales are typically calculated by billable hours. Retail forecasts, on the other hand, are typically based on sales per square foot.
• Create a profile of your ideal customer: For regional businesses, use the data from the Census Bureau to determine how many of your ideal customers live within a reasonable radius of your business.
• Estimate your market share: Do this by determining the total number of available customers and then predicting how many of them will buy from you. Remember, your customer base will increase over time, and that should be reflected in your numbers.
• Determine how often your customers will buy from you: This will vary by industry. For example, beauty salons can count on customers booking a service every four to six weeks. On the other hand, a tree-trimming service might estimate once a year.Predict the average dollar amount of each purchase for each of your product or service categories.

To arrive at your projected sales volume, take all the figures you have and input them into this formula:

Number of customers x average sales price x number of yearly purchases = Yearly projected sales

Next, deduct your total projected expenses from step two and you’ll have your revenue forecast.

Yearly projected sales – total projected expenses = Revenue forecast

5. Repeat the process 

It’s easy to be overconfident or too conservative in your projections. That’s why it’s a good idea to run these numbers three times. Run an optimistic projection, a pessimistic one, and a middle-of-the-road one. You can adjust your projections monthly as you see how real-world sales compare to your predictions.

• Optimistic projection: Use data in a best-case scenario with all external and internal factors working in your favor.
• Middle-of-the-road projection: Use data averages and stay slightly more conservative with your predictions.
• Pessimistic: Use extremely conservative data to create your projection, assuming external and internal factors do not work in your favor.

Forecasting revenue do’s and don’ts

There are proper guidelines to follow to prevent your forecasting from going off the rails—most of it surrounding the data and your expectations. For example, it’s wise not to make your forecasts without assistance. Information can be easily misinterpreted due to human error, so it’s best to have a second set of eyes. Below we’ll discuss other do’s and don’ts to keep in mind. 

Do base assumptions on data  

Internal data from historical figures as well as external data like seasonal spending and trends can be a benefit to your forecast. For example, if every September to November you see an uptick in your sales thanks to a popular annual festival, it’s safe to say you can expect the same rise in sales year over year.

Do make sure your forecast is regularly updated  

Trends change (sometimes overnight), and the only way to combat the ebb and flow of revenue expectations is to update your forecast regularly. For example, if you own an ice cream shop and you’ve found that ingredient prices are steadily on the rise, your forecast should be updated to reflect this. 

Don’t expect a perfect forecast

With forecasting, it’s better to be conservative with your expectations.Since a forecast is an estimate, you can never expect a perfect result. To be safe, always prepare for a percent error to allow for any unforeseen circumstances.

Don’t exclude pertinent data 

An example of this is underreporting revenue and cash income. Although some may see this as taking a more conservative approach, you can’t expect an accurate forecast without all the information.

Taking your forecast further

Following the steps and tips above can get you going in the right direction, but to take your forecasting even further, you need to start with a strong foundation. This comes from your revenue and expense tracking. 

In order to produce the most accurate revenue forecast, consider using tools like accounting software to take human error out of the equation. This way, you can be confident in knowing that your historical records are as accurate as possible.

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How to write a sales forecast for a business plan

Table of Contents

What is a sales forecast?

Why do you need a sales forecast, how do you write a sales forecast, top-down or bottom-up, writing your sales forecast, calculating a sales forecast, how can countingup help manage your forecasting.

Sales forecasts are an important part of your business plan . If done correctly, they can give accurate projections of your business’ cash flow, and let you better prepare for the year ahead. They can also make it easier to find the right investors . While it’s easier for existing businesses with plenty of data, you can still calculate a sales forecast for a new business .

In this guide, we’ll explore:

• How can you manage your forecasting?

A sales forecast is a prediction of your business’ future revenue. In order to be an accurate prediction, the forecast is based on previous sales, current economic trends, and industry performance. Having a sales forecast is a useful tool, because it gives you a better idea of how to manage your business. 

Having a sales forecast is like using the past to have a peek into the future of your company. It might not be 100% accurate, but it can help you plan any future spending, or prevent any cash flow issues from occurring. 

You can also use your sales forecast to monitor your business’ progress. For instance, if your business regularly performs better than your forecast, it could be a sign that your business is continuing to grow. On the other hand, if your actual sales are frequently less than expected, this could be a sign that your business is struggling and needs adjustment. 

It’s important to remember that any projections you make aren’t guaranteed, there can be advantages and disadvantages of financial forecasting . 

Now we’ve run through why having a sales forecast can help you run your business, let’s look at how to write one. 

While there are two types of sales forecasting (top-down and bottom-up), one is a lot more accurate for small businesses than the other. A top-down forecast looks at the market as a whole and attributes a portion of the market to your business. 

A top-down approach may work for large businesses that already own a significant chunk of the market. When forecasting for a small business, it’s easy to overestimate your market share. For example, a 1% market share may not seem like a lot, but a small restaurant owning 1% of the £89.5 billion UK market is extremely unrealistic.

The alternative to top-down is bottom-up. A bottom-up sales forecast starts with existing company data (like customer or product information) and works up to revenue. Since this starts with the company, it’s easier to 

Your sales forecast is ultimately a prediction of your revenue over a set period. It considers the amount you think you’ll sell, and the cost of those sales. We’ve included how to calculate a sales forecast below.

A sales forecast consists of three separate values: revenue, cost of goods sold, and gross profit. For estimating values in the calculations below, it’s best to use any existing business data to be as accurate as possible. 

To calculate your predicted revenue:

• Make a list of your available goods and services
• Note the price of each of your goods and services
• Estimate the expected sales of each good or service
• Multiply the price by the estimated sales to get your estimated revenue
• Add them all together to get your total revenue

For example, if your food truck business sold pizzas at £10 and burgers at £5, you would multiply these values by how much you expected to sell. For calculating a weekly sales forecast, you might estimate selling 60 pizzas and 80 burgers. Your predicted revenue for that week would be £600 for pizzas and £400 for burgers — giving £1,000 total.

In order to figure out how much profit you’ll make, you also need to calculate your costs for those predicted sales. To calculate your predicted costs:

• Figure out how much each good or service will cost per unit
• Multiply each cost by the projected sales

Using the same example as above, assume a single pizza cost £3.50 to make and a burger cost £2. Using the estimated sales, the total cost for your pizzas (3.5 x 60) would be £210, and £160 for your burgers (2 x 80). Combining these two figures gives you a total cost of £370.

The last step is to work out your gross profit , and it’s a relatively simple calculation.

• Subtract the total predicted cost from your total predicted revenue

Continuing with the example above, your revenue (£1,000) minus your costs (£370), leaves you with a projected gross profit of £630 for the week. Using this estimate, you can then plan how much working capital your business should have access to. It’s important to remember that these are only estimates, and your actual values can be higher or lower than your forecast.

If you want your forecasts to be as accurate as possible, you need to refer to all of your business’ financial data. Since collecting and collating this data can be challenging, you may want to use financial management software like the Countingup app. 

When trying to calculate your sales forecasts, having an up-to-date log of your current sales can be hugely beneficial. By combining a business current account with accounting software, Countingup is the only software that provides real-time cash flow tracking. 

The Countingup app also provides business owners with access to automatically generated profit and loss statements. These can prove invaluable when trying to stay aware of all your business’ costs.

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Business Plan Financial Projections

• Written By Dave Lavinsky

Financial projections are an important part of your business plan. The projections give investors and lenders an idea of how well your business is likely to do in the future. Financial projections include both income statements and balance sheets.

Financial projections are important for a number of reasons. First, they give investors and lenders an idea of how well your business is likely to do in the future. This can help you secure the funding you need to get your business off the ground. Financial projections also help you track your progress over time. You can use them to make sure your business is on track to meet its goals. Finally, financial projections can help you spot potential problems early on, so you can take corrective action.

What Are Business Plan Financial Projections?

Financial projections are an estimate of your company’s future financial performance through financial forecasting. They are typically used by businesses to secure funding, but can also be useful for internal decision-making and planning purposes. There are three main financial statements that you will need to include in your business plan financial projections:

1. Income Statement Projection

The income statement projection is a forecast of your company’s future revenues and expenses. It should include line items for each type of income and expense, as well as a total at the end.

There are a few key items you will need to include in your projection:

• Revenue: Your revenue projection should break down your expected sales by product or service, as well as by month. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.
• Expenses: Your expense projection should include a breakdown of your expected costs by category, such as marketing, salaries, and rent. Again, it is important to be realistic in your estimates.
• Net Income: The net income projection is the difference between your revenue and expenses. This number tells you how much profit your company is expected to make.

Sample Income Statement

2. cash flow statement & projection.

The cash flow statement and projection are a forecast of your company’s future cash inflows and outflows. It is important to include a cash flow projection in your business plan, as it will give investors and lenders an idea of your company’s ability to generate cash.

There are a few key items you will need to include in your cash flow projection:

• The cash flow statement shows a breakdown of your expected cash inflows and outflows by month. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.
• Cash inflows should include items such as sales revenue, interest income, and capital gains. Cash outflows should include items such as salaries, rent, and marketing expenses.
• It is important to track your company’s cash flow over time to ensure that it is healthy. A healthy cash flow is necessary for a successful business.

Sample Cash Flow Statements

3. balance sheet projection.

The balance sheet projection is a forecast of your company’s future financial position. It should include line items for each type of asset and liability, as well as a total at the end.

A projection should include a breakdown of your company’s assets and liabilities by category. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.

It is important to track your company’s financial position over time to ensure that it is healthy. A healthy balance is necessary for a successful business.

Sample Balance Sheet

How to create financial projections.

Creating financial projections for your business plan can be a daunting task, but it’s important to put together accurate and realistic financial projections in order to give your business the best chance for success.  

Cost Assumptions

When you create financial projections, it is important to be realistic about the costs your business will incur, using historical financial data can help with this. You will need to make assumptions about the cost of goods sold, operational costs, and capital expenditures.

It is important to track your company’s expenses over time to ensure that it is staying within its budget. A healthy bottom line is necessary for a successful business.

Capital Expenditures, Funding, Tax, and Balance Sheet Items

You will also need to make assumptions about capital expenditures, funding, tax, and balance sheet items. These assumptions will help you to create a realistic financial picture of your business.

Capital Expenditures

When projecting your company’s capital expenditures, you will need to make a number of assumptions about the type of equipment or property your business will purchase. You will also need to estimate the cost of the purchase.

When projecting your company’s funding needs, you will need to make a number of assumptions about where the money will come from. This might include assumptions about bank loans, venture capital, or angel investors.

When projecting your company’s tax liability, you will need to make a number of assumptions about the tax rates that will apply to your business. You will also need to estimate the amount of taxes your company will owe.

Balance Sheet Items

When projecting your company’s balance, you will need to make a number of assumptions about the type and amount of debt your business will have. You will also need to estimate the value of your company’s assets and liabilities.

Financial Projection Scenarios

Write two financial scenarios when creating your financial projections, a best-case scenario, and a worst-case scenario. Use your list of assumptions to come up with realistic numbers for each scenario.

Presuming that you have already generated a list of assumptions, the creation of best and worst-case scenarios should be relatively simple. For each assumption, generate a high and low estimate. For example, if you are assuming that your company will have $100,000 in revenue, your high estimate might be $120,000 and your low estimate might be $80,000.

Once you have generated high and low estimates for all of your assumptions, you can create two scenarios: a best case scenario and a worst-case scenario. Simply plug the high estimates into your financial projections for the best-case scenario and the low estimates into your financial projections for the worst-case scenario.

Conduct a Ratio Analysis

A ratio analysis is a useful tool that can be used to evaluate a company’s financial health. Ratios can be used to compare a company’s performance to its industry average or to its own historical performance.

There are a number of different ratios that can be used in ratio analysis. Some of the more popular ones include the following:

• Gross margin ratio
• Operating margin ratio
• Return on assets (ROA)
• Return on equity (ROE)

To conduct a ratio analysis, you will need financial statements for your company and for its competitors. You will also need industry average ratios. These can be found in industry reports or on financial websites.

Once you have the necessary information, you can calculate the ratios for your company and compare them to the industry averages or to your own historical performance. If your company’s ratios are significantly different from the industry averages, it might be indicative of a problem.

Be Realistic

When creating your financial projections, it is important to be realistic. Your projections should be based on your list of assumptions and should reflect your best estimate of what your company’s future financial performance will be. This includes projected operating income, a projected income statement, and a profit and loss statement.

Your goal should be to create a realistic set of financial projections that can be used to guide your company’s future decision-making.

Sales Forecast

One of the most important aspects of your financial projections is your sales forecast. Your sales forecast should be based on your list of assumptions and should reflect your best estimate of what your company’s future sales will be.

Your sales forecast should be realistic and achievable. Do not try to “game” the system by creating an overly optimistic or pessimistic forecast. Your goal should be to create a realistic sales forecast that can be used to guide your company’s future decision-making.

Creating a sales forecast is not an exact science, but there are a number of methods that can be used to generate realistic estimates. Some common methods include market analysis, competitor analysis, and customer surveys.

Create Multi-Year Financial Projections

When creating financial projections, it is important to generate projections for multiple years. This will give you a better sense of how your company’s financial performance is likely to change over time.

It is also important to remember that your financial projections are just that: projections. They are based on a number of assumptions and are not guaranteed to be accurate. As such, you should review and update your projections on a regular basis to ensure that they remain relevant.

Creating financial projections is an important part of any business plan. However, it’s important to remember that these projections are just estimates. They are not guarantees of future success.

Business Plan Financial Projections FAQs

What is a business plan financial projection.

A business plan financial projection is a forecast of your company's future financial performance. It should include line items for each type of asset and liability, as well as a total at the end.

What are annual income statements? 

The Annual income statement is a financial document and a financial model that summarize a company's revenues and expenses over the course of a fiscal year. They provide a snapshot of a company's financial health and performance and can be used to track trends and make comparisons with other businesses.

What are the necessary financial statements?

The necessary financial statements for a business plan are an income statement, cash flow statement, and balance sheet.

How do I create financial projections?

You can create financial projections by making a list of assumptions, creating two scenarios (best case and worst case), conducting a ratio analysis, and being realistic.

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What Is Revenue Forecasting?

Take a deeper look into the intricacies of revenue forecasting: its importance, methods, benefits, and accuracy tips for effective business planning and growth.

Salesforce Staff

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Revenue and forecasting models are significant business practices that predict future revenue based on historical data, future demand, and current trends. It empowers businesses to plan for growth, make informed decisions, and effectively manage their finances. This blog post will closely examine the revenue forecasting model, exploring its benefits, challenges, and methodologies. We will also provide practical tips to enhance backlog revenue forecasting model accuracy and ensure sustainable business growth.

Revenue forecasts explained

So, why is revenue forecasting important? Revenue forecasting is the foundation within the business planning space, empowering organisations to peer into the future and anticipate their financial trajectory. This entails meticulously analysing historical data and current market trends to make informed predictions about upcoming revenue streams. This process of revenue forecast models acts like a compass for financial planning, guiding businesses through the complexities of decision-making, resource allocation, and financial management of future revenues.

The significance of revenue forecasting cannot be overstated. It serves as a starting point for businesses to chart their course towards growth and sustainability. Businesses can allocate their resources judiciously by accurately predicting future revenue growth, ensuring that every dollar invested yields maximum returns. This foresight enables them to make choices regarding investments, sales team hiring, and marketing strategies, significant for startups and small businesses with limited resources.

For large enterprises, revenue forecasting is equally important in navigating the complexities of growth and financial management. It gives business leaders the necessary insights to make strategic decisions about product development, market expansion, and capital investments. By anticipating revenue streams or forecasting revenue and drivers, these businesses can elevate their operations, identify revenue growth and expansion opportunities, and mitigate potential risks.

Revenue forecasting is an art and a science, blending historical data with market intelligence to make accurate forecasts that paint a vivid picture of the future. By mastering this practice, businesses gain the power to navigate uncertainty and seize opportunities for sustainable growth. It is a practice that empowers businesses to thrive in a dynamic and ever-changing marketplace.

Benefits of revenue forecasting

Revenue forecasting offers a wealth of benefits to businesses, enabling them to improve resource allocation and navigate the ever-changing market landscape with greater agility. One of the primary advantages of a revenue forecasting business model is its ability to guide businesses in making well-informed decisions about resource allocation. By accurately predicting future revenue, companies can allocate their resources judiciously, directing investments towards areas with the highest potential for growth and profitability. This data-driven approach minimises wastage and maximises returns, ensuring that every dollar invested yields optimal results.

Another significant benefit of a revenue forecasting model is its role in proactively managing cash flow and preventing unexpected financial surprises. By using accurate revenue forecasting models and anticipating revenue streams, businesses can effectively plan for upcoming expenses and manage their cash flow more efficiently. This foresight allows companies to avoid cash flow shortfalls, ensuring they have the necessary liquidity to meet their financial obligations and capitalise on new opportunities.

Revenue forecasting also plays a key role in setting realistic sales targets for marketing campaigns and tracking the sales pipeline’s progress towards achieving them. With accurate revenue projections, businesses can establish achievable sales goals that align the sales cycle with their overall growth objectives. This clarity enables sales teams to focus on high-priority prospects and develop targeted strategies to drive revenue growth. Regularly monitoring the sales pipeline and team’s progress against these targets allows businesses to make timely adjustments and course corrections, ensuring they stay on track to meet their revenue goals .

In summary, revenue forecasting is a powerful tool that empowers businesses to see future sales, make better decisions regarding revenue, optimise resource allocation and growth rate, manage cash flow effectively, and set realistic sales targets. By leveraging historical data and current trends to create a revenue forecast, businesses can gain invaluable insights into their future revenue potential and navigate the complexities of the market with greater confidence and success.

Challenges of revenue forecasting

Within the scope of revenue forecasting, while presenting a plethora of benefits, is not without its share of formidable challenges. One significant hurdle businesses encounter in performing revenue forecasting is acquiring precise and dependable historical data points. Formulating well-informed predictions hinges on compiling historical and future sales data, market trends, and economic indicators. However, the accuracy of these data sources can be undermined by human error, data manipulation, or external factors that lie beyond a company’s sphere of control. Consequently, generating reliable and accurate revenue forecasts can be an arduous task.

Another challenge emanates from the inherent unpredictability of external events. Economic fluctuations, shifts in consumer preferences, technological advancements, and regulatory changes can profoundly impact revenue projections. For instance, the COVID-19 pandemic served as a stark reminder of the disruptive potential of unforeseen events, as it wreaked havoc on global supply chains and consumer behaviour, resulting in substantial revenue losses for countless businesses. Navigating such volatile environments demands high adaptability and responsiveness to changing circumstances.

Human error lurks as a constant threat in the revenue forecasting process. Manual data entry, computational errors, and subjective judgments can introduce inaccuracies that undermine the integrity of the revenue and forecasted revenue and models. To mitigate this challenge, businesses must implement robust data validation protocols, embrace automated revenue forecasting models and tools, and involve multiple stakeholders. By doing so, they can minimise the likelihood of human-induced errors and enhance the reliability of their forecast revenue projections.

The intricate nature of contemporary business models further compounds the challenges of revenue forecasting. Businesses today operate within dynamic and interconnected markets, rendering accurate predictions of revenue streams increasingly elusive. Factors such as product diversification, global expansion, and evolving customer segments add complexity to the revenue forecasting process. To navigate this, businesses must employ sophisticated revenue forecasting models and techniques and leverage advanced analytics to account for these complexities and improve the precision of their revenue projections.

Last but not least, the ever-shifting sands of customer behaviour pose a persistent challenge for revenue forecasting. Consumer preferences, purchasing patterns, and market trends are in perpetual flux, making it arduous for businesses to keep pace. To surmount this obstacle, businesses must constantly be vigilant about market dynamics, conduct regular customer surveys, and meticulously analyse consumer data to gain invaluable insights into these shifting behaviours. By attuning themselves to the pulse of their customers, businesses can refine their revenue forecasts and adapt their sales strategies accordingly, ensuring their continued success in the face of constant change.

Types of revenue forecasting methods

Several revenue and forecasting tools and methods are available, each with advantages and disadvantages. The choice of method depends on the availability of data, the complexity of the various business models, and the level of accuracy required.

One standard revenue forecasting method is the moving average method. This method takes the average of the revenue from a specified number of past periods and uses it to predict future revenue. The moving average method is simple to use and understand, but it can be slow to react to changes in the underlying trend.

Another revenue forecasting method is exponential smoothing. This method assigns exponentially decreasing weights to past revenue data, with more recent data given more weight. Exponential smoothing is more responsive to changes in the underlying trend than the moving average method, but it can be more sensitive to noise in the data.

Regression analysis is a statistical technique that can be used to predict revenue based on the relationship between expected revenue, and other variables, such as economic indicators, marketing efforts, and competitive activity. Regression analysis can be a powerful revenue forecasting tool, but it requires significant data and can be difficult to implement.

Monte Carlo simulation is a technique that uses random sampling to generate a range of possible, future values for revenue outcomes. The Monte Carlo simulation can be used to estimate the probability of achieving different forecast revenue and targets and assess the risk associated with different revenue targets and forecasts. Monte Carlo simulation is a powerful revenue forecasting tool, but it can be computationally intensive and requires significant data.

Bottom-up revenue forecasting software is a method that involves building a revenue forecast from the ground up, by starting with individual sales estimates for each product or service and then aggregating them to arrive at a total revenue forecast. The bottom-up revenue forecasting model is a detailed and accurate revenue forecasting method, but it can be time-consuming and complex to implement.

The choice of revenue forecasting method depends on the specific needs and circumstances of the business. Some businesses may find that a simple method like the moving average method is sufficient, while others may need a more sophisticated method like regression analysis or Monte Carlo simulation.

How to improve revenue forecasting accuracy

To improve revenue forecasting accuracy, businesses should leverage historical performance data to identify patterns and trends in past performance that can inform their future sales projections . By analysing past performance, businesses can gain insights into seasonal fluctuations, economic cycles, and customer behaviour that affect revenue, enabling them to make more informed revenue predictions.

Additionally, gathering and analysing market research can provide valuable information about industry trends, competitors’ strategies, and customer preferences. This information can be incorporated into revenue forecasts to enhance accuracy and reliability.

Incorporating machine learning and artificial intelligence (AI) into revenue and forecasting models can significantly improve the accuracy of predictions. These technologies can analyse large volumes of data, identify complex patterns, and make predictions based on real-time information. By leveraging machine learning and AI, businesses can better understand customer behaviour and market dynamics, resulting in more precise and accurate revenue forecasts.

Regularly reviewing sales forecasting and updating forecasts is essential to maintaining accuracy. Businesses should continuously make sales forecasts, monitor actual performance against sales forecast-ed results and adjust sales forecasts as needed. This process ensures accurate forecasting and that forecasts remain aligned with changing market conditions and evolving business strategies.

Finally, conducting scenario planning and sensitivity analysis can help businesses create a revenue forecast and assess the impact of different variables on revenue forecasts. Businesses can make more robust and resilient revenue projections by considering various scenarios, such as changes in economic conditions, competitive landscapes, or customer demand.

By implementing these strategies, businesses can significantly improve the accuracy of their revenue forecasts, enabling them to optimise resource allocation, and achieve their financial goals.

How to Forecast Revenue

Building an accurate revenue forecast is crucial for any business looking to allocate resources effectively, and achieve its financial goals. Historical revenue data serves as valuable groundwork to begin the forecasting process. Businesses can identify patterns, seasonality, and growth rates by analysing past revenue and identifying trends therein, providing insights into future performance.

The next step, which affects the revenue forecast, involves recognising external factors that may impact revenue, such as market conditions, industry trends, and economic fluctuations. Incorporating these external factors into the revenue forecast helps create a more realistic and comprehensive revenue projection.

Businesses can then employ various revenue forecasting models and projection methods to enhance the accuracy of their revenue predictions. Some standard revenue forecasting methods and projection methods include:

Moving Average: This method calculates the average revenue over a specific period, such as the last 12 months. It is straightforward and suitable for stable revenue patterns.

Exponential Smoothing: This method assigns more weight to recent revenue growth rate data, assuming it is more indicative of future revenue growth rates and trends. It is useful when revenue is growing or declining at a steady rate.

Regression Analysis: This statistical technique establishes a relationship between a company’s revenue and one or more independent variables, such as marketing spend or economic indicators. It is effective when a clear correlation exists between revenue and these variables.

Monte Carlo Simulation: This method uses random sampling to generate multiple possible revenue outcomes, providing a range of potential scenarios. It is beneficial for complex revenue streams with multiple variables.

Bottom-up Forecasting: The bottom-up pipeline revenue forecasting model or method estimates revenue by summing up individual revenue components, such as product lines or customer segments. It is suitable for businesses with diverse revenue streams.

By combining historical data analysis, external factor consideration, a forecasting model, and other appropriate forecasting tools and methods , businesses can generate revenue forecasts that are both accurate and reliable. This empowers them to make strategic decisions, optimise resource allocation, and navigate the uncertainties of the business landscape with greater confidence.

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3 Revenue Forecasting Models for Accurate Revenue Predictions

Jerusha Songate on April 27, 2021

Table of Contents

More baremetrics articles.

Revenue forecasting models help you plan your next phase of growth. Financial models also help you plan how to pivot in response to certain scenarios, like a sudden drop-off in sales or an unexpected surge in demand.

The Baremetrics article  “The SaaS Financial Model You’ll Actually Use”  describes how to create financial models you can use to plan out your next steps—even when your total revenue falls short and things don’t go as expected.

Let’s take a deep dive into why accurate forecasting is an essential business tool, and how you can get started using it to predict future sales. We’ll review the forecasting process and three specific forecasting techniques that may offer the insight you need for revenue projections.

Ready to go to the next level with your forecasting metrics? Sign up for a free trial of Baremetrics today!

What is Revenue Forecasting?

Revenue forecasting is predicting how much revenue you expect to make over a certain period. Those periods range from a quarter (3 months) to a full year.

This process is not just a guess about how much money your business will generate, but some experts admit that, for a startup, revenue forecasting is  more of an art than a science .

Other commentators distinguish between  judgment forecasting —based on intuition and anecdotal evidence—and quantitative forecasting—based on current and historical data. Ideally, data drives your revenue forecasts.

Want to make the most out of the sales data your company collects? Sign up for a Baremetrics free trial today!

Importance of Revenue Forecasting Models

Revenue forecasting models offer a method for predicting revenue. They allow you to move beyond personal judgment—your “best guess” of the success of your sales process—toward quantitative analysis.

Of course, hard data isn’t always possible. If it’s your business’s first year, you may have to rely on intuitive forecasting. Often that comes from your salespeople’s assessment of the likelihood that leads will pan out.

Forecasting models are important because they drive decision-making in your business. They influence your decisions to hire more people, expand into new markets, and set goals for upcoming quarters.

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Three Methods of Revenue and Sales Forecasting

Here are three ways to rely on proven methods of predicting revenue, and develop a picture of your company’s success.

1. Opportunity stage forecasting

This method predicts revenue based on your current prospects. It uses historical data to add a numerical value to each prospect given their stage in the sales journey. The further they are down your sales pipeline, the greater the chances the deal will close.

As an example, assume that over the past two quarters, 60 percent of customers who reached the stage of signing up for a free trial eventually purchased a subscription.

You can use this forecasting method to predict that 60 percent of prospects currently enrolled in a free trial will subscribe. Using this figure, you can forecast your revenue.

In theory, you can predict your revenue based on any opportunity stage. But the further down in the funnel they are, the more accurate the forecast becomes. That’s because you know more about these potential clients, enough to predict future revenue.

There are potential flaws in this method. It does not consider the  age of each prospect . An older lead, or someone who lingers before reaching the stage of the free trial, is perhaps less likely to commit than one who goes through the early stages quickly. Opportunity stage forecasting treats both prospects equally.

2. Test market analysis forecasting

This method helps you to predict revenue based on the projected interest in a product. The process involves rolling out a product or service to a test market and reviewing the results. This is a particularly valuable method for startups who may not have historical data to draw from.

An example of a test market can be a rollout to a small segment of consumers or businesses. Crowdfunding campaigns, such as Kickstarter or Indiegogo, are one form of test marketing.

This method also has its drawbacks. There is no guarantee your product will perform as well in an open market as it did in your test market. Before using this method, it is wise to use additional data that considers competition in your industry and the buying habits of your target consumers.

3. Historical forecasting

This is a straightforward revenue forecasting model.  Historical forecasting  assumes that whatever has happened in the past will continue to happen.

As an example, say your revenue was $100,000 in January. Historical forecasting assumes revenue will also reach $100,000 in February and subsequent months.

There are some drawbacks to this method as well. Although it draws on historical reality, it assumes a lot about the future. First, that sales are steady and  monthly recurring revenue doesn’t contract or expand. They don’t go down or go up. Second, it does not take into account natural fluctuations, like seasonality, changes in customer demand, or growth as the result of your sales team’s efforts.

There are ways to modify this method to make it more accurate. You can look at trends over the past 6 months to a year. This should show a moving average that considers seasonal changes and  revenue growth  rate.

You can then change your sales forecast projections accordingly by starting with average sales rates that are a more accurate sales picture for your business.

The month-by-month comparison may serve as a benchmark rather than as a straightforward method that ensures forecast accuracy.

How Baremetrics Helps!

Baremetrics uses real data points from your business to help you make smart predictions.

The forecasting tool  is your go-to resource for revenue predictions you can rely on for budgeting and operational decisions.

Baremetrics analytics and insights give you access to powerful data sets about your customers that you can use to create financial models  to build your business.

To learn more about Baremetrics , sign up for a free trial today.

Jerusha Songate

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Free Financial Templates for a Business Plan

By Andy Marker | July 29, 2020

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In this article, we’ve rounded up expert-tested financial templates for your business plan, all of which are free to download in Excel, Google Sheets, and PDF formats.

Included on this page, you’ll find the essential financial statement templates, including income statement templates , cash flow statement templates , and balance sheet templates . Plus, we cover the key elements of the financial section of a business plan .

Financial Plan Templates

Download and prepare these financial plan templates to include in your business plan. Use historical data and future projections to produce an overview of the financial health of your organization to support your business plan and gain buy-in from stakeholders

Business Financial Plan Template

Use this financial plan template to organize and prepare the financial section of your business plan. This customizable template has room to provide a financial overview, any important assumptions, key financial indicators and ratios, a break-even analysis, and pro forma financial statements to share key financial data with potential investors.

Download Financial Plan Template

Word | PDF | Smartsheet

Financial Plan Projections Template for Startups

This financial plan projections template comes as a set of pro forma templates designed to help startups. The template set includes a 12-month profit and loss statement, a balance sheet, and a cash flow statement for you to detail the current and projected financial position of a business.

‌ Download Startup Financial Projections Template

Excel | Smartsheet

Income Statement Templates for Business Plan

Also called profit and loss statements , these income statement templates will empower you to make critical business decisions by providing insight into your company, as well as illustrating the projected profitability associated with business activities. The numbers prepared in your income statement directly influence the cash flow and balance sheet forecasts.

Pro Forma Income Statement/Profit and Loss Sample

Use this pro forma income statement template to project income and expenses over a three-year time period. Pro forma income statements consider historical or market analysis data to calculate the estimated sales, cost of sales, profits, and more.

‌ Download Pro Forma Income Statement Sample - Excel

Small Business Profit and Loss Statement

Small businesses can use this simple profit and loss statement template to project income and expenses for a specific time period. Enter expected income, cost of goods sold, and business expenses, and the built-in formulas will automatically calculate the net income.

‌ Download Small Business Profit and Loss Template - Excel

3-Year Income Statement Template

Use this income statement template to calculate and assess the profit and loss generated by your business over three years. This template provides room to enter revenue and expenses associated with operating your business and allows you to track performance over time.

Download 3-Year Income Statement Template

For additional resources, including how to use profit and loss statements, visit “ Download Free Profit and Loss Templates .”

Cash Flow Statement Templates for Business Plan

Use these free cash flow statement templates to convey how efficiently your company manages the inflow and outflow of money. Use a cash flow statement to analyze the availability of liquid assets and your company’s ability to grow and sustain itself long term.

Simple Cash Flow Template

Use this basic cash flow template to compare your business cash flows against different time periods. Enter the beginning balance of cash on hand, and then detail itemized cash receipts, payments, costs of goods sold, and expenses. Once you enter those values, the built-in formulas will calculate total cash payments, net cash change, and the month ending cash position.

Download Simple Cash Flow Template

12-Month Cash Flow Forecast Template

Use this cash flow forecast template, also called a pro forma cash flow template, to track and compare expected and actual cash flow outcomes on a monthly and yearly basis. Enter the cash on hand at the beginning of each month, and then add the cash receipts (from customers, issuance of stock, and other operations). Finally, add the cash paid out (purchases made, wage expenses, and other cash outflow). Once you enter those values, the built-in formulas will calculate your cash position for each month with.

‌ Download 12-Month Cash Flow Forecast

3-Year Cash Flow Statement Template Set

Use this cash flow statement template set to analyze the amount of cash your company has compared to its expenses and liabilities. This template set contains a tab to create a monthly cash flow statement, a yearly cash flow statement, and a three-year cash flow statement to track cash flow for the operating, investing, and financing activities of your business.

Download 3-Year Cash Flow Statement Template

For additional information on managing your cash flow, including how to create a cash flow forecast, visit “ Free Cash Flow Statement Templates .”

Balance Sheet Templates for a Business Plan

Use these free balance sheet templates to convey the financial position of your business during a specific time period to potential investors and stakeholders.

Small Business Pro Forma Balance Sheet

Small businesses can use this pro forma balance sheet template to project account balances for assets, liabilities, and equity for a designated period. Established businesses can use this template (and its built-in formulas) to calculate key financial ratios, including working capital.

Download Pro Forma Balance Sheet Template

Monthly and Quarterly Balance Sheet Template

Use this balance sheet template to evaluate your company’s financial health on a monthly, quarterly, and annual basis. You can also use this template to project your financial position for a specified time in the future. Once you complete the balance sheet, you can compare and analyze your assets, liabilities, and equity on a quarter-over-quarter or year-over-year basis.

Download Monthly/Quarterly Balance Sheet Template - Excel

Yearly Balance Sheet Template

Use this balance sheet template to compare your company’s short and long-term assets, liabilities, and equity year-over-year. This template also provides calculations for common financial ratios with built-in formulas, so you can use it to evaluate account balances annually.

Download Yearly Balance Sheet Template - Excel

For more downloadable resources for a wide range of organizations, visit “ Free Balance Sheet Templates .”

Sales Forecast Templates for Business Plan

Sales projections are a fundamental part of a business plan, and should support all other components of your plan, including your market analysis, product offerings, and marketing plan . Use these sales forecast templates to estimate future sales, and ensure the numbers align with the sales numbers provided in your income statement.

Basic Sales Forecast Sample Template

Use this basic forecast template to project the sales of a specific product. Gather historical and industry sales data to generate monthly and yearly estimates of the number of units sold and the price per unit. Then, the pre-built formulas will calculate percentages automatically. You’ll also find details about which months provide the highest sales percentage, and the percentage change in sales month-over-month. 

Download Basic Sales Forecast Sample Template

12-Month Sales Forecast Template for Multiple Products

Use this sales forecast template to project the future sales of a business across multiple products or services over the course of a year. Enter your estimated monthly sales, and the built-in formulas will calculate annual totals. There is also space to record and track year-over-year sales, so you can pinpoint sales trends.

Download 12-Month Sales Forecasting Template for Multiple Products

3-Year Sales Forecast Template for Multiple Products

Use this sales forecast template to estimate the monthly and yearly sales for multiple products over a three-year period. Enter the monthly units sold, unit costs, and unit price. Once you enter those values, built-in formulas will automatically calculate revenue, margin per unit, and gross profit. This template also provides bar charts and line graphs to visually display sales and gross profit year over year.

Download 3-Year Sales Forecast Template - Excel

For a wider selection of resources to project your sales, visit “ Free Sales Forecasting Templates .”

Break-Even Analysis Template for Business Plan

A break-even analysis will help you ascertain the point at which a business, product, or service will become profitable. This analysis uses a calculation to pinpoint the number of service or unit sales you need to make to cover costs and make a profit.

Break-Even Analysis Template

Use this break-even analysis template to calculate the number of sales needed to become profitable. Enter the product's selling price at the top of the template, and then add the fixed and variable costs. Once you enter those values, the built-in formulas will calculate the total variable cost, the contribution margin, and break-even units and sales values.

Download Break-Even Analysis Template

For additional resources, visit, “ Free Financial Planning Templates .”

Business Budget Templates for Business Plan

These business budget templates will help you track costs (e.g., fixed and variable) and expenses (e.g., one-time and recurring) associated with starting and running a business. Having a detailed budget enables you to make sound strategic decisions, and should align with the expense values listed on your income statement.

Startup Budget Template

Use this startup budget template to track estimated and actual costs and expenses for various business categories, including administrative, marketing, labor, and other office costs. There is also room to provide funding estimates from investors, banks, and other sources to get a detailed view of the resources you need to start and operate your business.

Download Startup Budget Template

Small Business Budget Template

This business budget template is ideal for small businesses that want to record estimated revenue and expenditures on a monthly and yearly basis. This customizable template comes with a tab to list income, expenses, and a cash flow recording to track cash transactions and balances.

Download Small Business Budget Template

Professional Business Budget Template

Established organizations will appreciate this customizable business budget template, which  contains a separate tab to track projected business expenses, actual business expenses, variances, and an expense analysis. Once you enter projected and actual expenses, the built-in formulas will automatically calculate expense variances and populate the included visual charts. 

‌ Download Professional Business Budget Template

For additional resources to plan and track your business costs and expenses, visit “ Free Business Budget Templates for Any Company .”

Other Financial Templates for Business Plan

In this section, you’ll find additional financial templates that you may want to include as part of your larger business plan.

Startup Funding Requirements Template

This simple startup funding requirements template is useful for startups and small businesses that require funding to get business off the ground. The numbers generated in this template should align with those in your financial projections, and should detail the allocation of acquired capital to various startup expenses.

Download Startup Funding Requirements Template - Excel

Personnel Plan Template

Use this customizable personnel plan template to map out the current and future staff needed to get — and keep — the business running. This information belongs in the personnel section of a business plan, and details the job title, amount of pay, and hiring timeline for each position. This template calculates the monthly and yearly expenses associated with each role using built-in formulas. Additionally, you can add an organizational chart to provide a visual overview of the company’s structure. 

Download Personnel Plan Template - Excel

Elements of the Financial Section of a Business Plan

Whether your organization is a startup, a small business, or an enterprise, the financial plan is the cornerstone of any business plan. The financial section should demonstrate the feasibility and profitability of your idea and should support all other aspects of the business plan. 

Below, you’ll find a quick overview of the components of a solid financial plan.

• Financial Overview: This section provides a brief summary of the financial section, and includes key takeaways of the financial statements. If you prefer, you can also add a brief description of each statement in the respective statement’s section.
• Key Assumptions: This component details the basis for your financial projections, including tax and interest rates, economic climate, and other critical, underlying factors.
• Break-Even Analysis: This calculation helps establish the selling price of a product or service, and determines when a product or service should become profitable.
• Pro Forma Income Statement: Also known as a profit and loss statement, this section details the sales, cost of sales, profitability, and other vital financial information to stakeholders.
• Pro Forma Cash Flow Statement: This area outlines the projected cash inflows and outflows the business expects to generate from operating, financing, and investing activities during a specific timeframe.
• Pro Forma Balance Sheet: This document conveys how your business plans to manage assets, including receivables and inventory.
• Key Financial Indicators and Ratios: In this section, highlight key financial indicators and ratios extracted from financial statements that bankers, analysts, and investors can use to evaluate the financial health and position of your business.

Need help putting together the rest of your business plan? Check out our free simple business plan templates to get started. You can learn how to write a successful simple business plan  here . 

Visit this  free non-profit business plan template roundup  or download a  fill-in-the-blank business plan template  to make things easy. If you are looking for a business plan template by file type, visit our pages dedicated specifically to  Microsoft Excel ,  Microsoft Word , and  Adobe PDF  business plan templates. Read our articles offering  startup business plan templates  or  free 30-60-90-day business plan templates  to find more tailored options.

Discover a Better Way to Manage Business Plan Financials and Finance Operations

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How to Forecast Profits for a Business Plan

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The Role of Finance in Formulating Business Strategies

How do changes in the business environment affect the cost and profit analysis, how to calculate budgeted revenue.

• How to Estimate Revenue & Net Income of a Company Based on Previous Financials
• Factors That Influence Contingency Planning

The goal of every small-business owner is to make a profit and hopefully earn greater profits each year. The company’s business plan describes the actions the company’s management team intends to take to generate sales and keep expenditures at reasonable levels so the net result is a profit.

The financial forecast is the numerical expression of the strategies described in the business plan, showing the revenues the company expects to generate, minus the costs of generating the revenues and operating the business, to arrive at profits.

Analyze the Marketplace

In the planning process, the business owner develops assumptions regarding the economic and competitive environments he expects the company will be operating in over the time horizon the plan addresses. This could be one year or three to five years. These assumptions shape the forecasting process.

If he believes competition will intensify for example, he may increase his marketing budget so his company will not lose market share to current or new competitors. He would also keep his revenue forecast conservative, reflecting that it may be difficult to acquire new customers.

Build Revenue Models

With the assumptions in place, the next step is to construct financial models and forecast revenues. These models can be most easily created using spreadsheet software, or you can purchase and use a small-business accounting software program, explains NOLO.com . The business owner builds formulas that depict the steps involved in making a sale. He then creates assumptions for each of the variables in the formulas.

Using spreadsheet software allows him to vary the assumptions and see how this affects revenues. His goal is to reach the point he is confident his revenue projections are reasonable and attainable.

Project Marketing Costs

For many small businesses, the marketing budget is one of the largest categories of expense. Marketing costs can be difficult to forecast because they are discretionary -- the business owner can elect to spend more or less on advertising in the upcoming year for example. The company’s marketing strategies are broken down into specific steps or tasks that must be completed to implement them.

The cost of each of these steps must be estimated carefully so that the overall marketing plan shows what actually must be spent to implement the strategies and achieve the company’s revenue goals. Inaccurate estimates of marketing costs results in a profit shortfall relative to plan – the company will end up spending more for marketing than was incorporated in the forecast.

Forecast Operating Costs

The business plan specifies other actions the company intends to take, such as hiring additional staff and opening additional retail locations. The cost of these are estimated and included in the expense forecast in the business plan. Accurate expense projections are so important, Entrepreneur magazine recommends forecasting them first .

A challenge faced by a small business owner is making sure he has sufficient staff to support the business activity he forecasts in the revenues section of the plan. If his staff level is inadequate, customer service can fall below acceptable levels and workloads may be so high that employee morale suffers.

Review, Discuss and Adjust

The revenue and expense forecasts are combined to reveal the projected profit forecast for the company. The forecasting process is not over at this point. The business owner and his management team must go over the entire financial plan and make adjustments where necessary.

The first draft of the forecast may show profits that are lower than the business owner had expected. He may decide to trim certain operating costs to produce a healthier bottom line. Cost cutting in a budget must be done thoughtfully, because marketing expenditures, for example, help drive revenue growth.

• NOLO: Basic Profit and Loss Forecast
• Entrepreneur: How to Forecast Revenue and Growth

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What is a revenue model, how to put a business plan in motion, how to make a projected sales budget, the purpose of analytical business reports, developing a financial plan for a small business, advantages & disadvantages of a rolling budget, the importance of revenue variances, how to write a department business plan, how to do income statement projections with historical data, most popular.

• 1 What Is a Revenue Model?
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• 3 How to Make a Projected Sales Budget
• 4 The Purpose of Analytical Business Reports

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How to Forecast Expenses and Revenue in LivePlan

Posted september 25, 2023 by lauren mcholm.

Forecasting revenue and expenses is the start of your business roadmap. One that helps you set sales targets, reduce spending, and uncover strategies to improve profitability. 

This article covers creating both forecasts in four simple steps using LivePlan.  

If you’re not a current LivePlan subscriber —you’ll still come away with critical insight into building useful revenue and expense forecasts.

Key Takeaways

• Review your business model, past financial statements, and industry benchmarks before forecasting.
• Keep your revenue streams simple.
• Start with fixed expenses.
• Tie variable expenses to your revenue.
• Go with your best estimates.

3 things to consider before forecasting

To make forecasting quick and easy, do these three things before diving into the numbers.

Revisit your business model

Revenue and expenses are tied to customer demand. You’re predicting how well you’ll be able to sell to your customers and how that will impact money flowing in and out of your business.

Hopefully, you’ve done the market research necessary to understand your target market. 

Because you need to understand:

• How and where your customers like to make purchases
• How much they’re willing to spend
• How they like to pay
• If they’re willing to make repeat or complementary purchases, etc.

Look at your business model. 

• Does it support the needs of your customers? 
• Are your core business drivers (the things that you sell) what your customers want? 
• Are there missing revenue streams that would lead to greater sales?

Tip: Make this review process faster with the LivePlan Pitch . It guides you in outlining your business model as bulleted lists or single sentences. 

Revenue = sales buckets

As you answer these questions—start creating strategic sales “buckets.” These may be single units, recurring revenue, additional fees, asset sales, etc. 

Your goal is not to create an overly detailed and complex list of every potential revenue source. 

Your goal is to establish “buckets” that minimize how much you’re forecasting. You want revenue streams that are easy to track and analyze. That way you’ll know how well you are meeting strategic sales targets. 

Tip: If you’re unsure which revenue streams make sense for your business—try the Suggested Revenue Streams feature to generate a list of viable options.

Pull up past financial statements

Successful forecasting is just as much about looking to the past as it is about considering the future. 

If you’re an up-and-running business—pull out your past financial statements. If you have a current budget , even better! It will come in very handy as you categorize expenses. 

Your past financial performance then becomes your starting point. 

• It outlines what your business has done previously.
• Helps set realistic expectations. 
• Makes it easier to identify changes that lead to growth.

Tip: Using QuickBooks or Xero? Skip manual data entry and import your data directly into LivePlan. Plus, with the Live Forecast feature your forecasts will update with the push of a button.   

Review industry benchmarks

If you’re just starting—you likely have no financial data to use. 

That doesn’t mean you’re stuck guessing. Just use the financial performance of similar businesses . You can start by reviewing sources such as Reuters and the US Census Bureau. 

And if you’re a LivePlan user, you don’t have to hunt for this information. You have access to industry benchmarks in app—making comparisons to your forecast and accounting data quick and easy. 

Tip: Revisit industry benchmarks regularly. You’ll better understand how your business compares to the competition and what market shifts or trends could impact your business.

How to forecast revenue and expenses in LivePlan

That bit of upfront work, which can all be done in LivePlan, is about to pay off. 

You’re ready to create a revenue and expense forecast—quickly and efficiently. 

1. Name your revenue streams

Remember those “sales buckets”? Let’s add them in. But don’t overcomplicate it.

Start with the bucket that contains your main product/service. Name your revenue stream and walk through the steps outlined below and in LivePlan. Then go onto the next bucket you identified.

You’ll become more familiar with the process—making forecasting the rest much easier.  

Tip: If you haven’t solidified your revenue streams you can always:

• Look back at your previous financial statements.
• Use LivePlan Assistant to generate possible revenue streams.

2. Choose the type of revenue

The type of revenue you bring in will impact how you forecast.

There are four common options:

• Unit sales: Sales of products as individual units or set quantities.
• Billable hours: Services priced on an hourly basis.
• Recurring revenue: Charges that occur on an ongoing basis (typically monthly, quarterly, or annually). 
• Revenue only: Open-ended revenue expressed as a raw number, and typically associated with one-off or uncommon transactions.

What you choose depends on your business model. 

For example, if you’re selling a subscription, you’ll opt for recurring revenue to track ongoing sales. If you’re selling individual products in-store or online—unit sales are the right choice.

When working in LivePlan, you’ll select from those four revenue options. 

The app will then walk you through adding:

• When this revenue starts.
• How much you expect to sell in each period.
• What your price for each product/service is.
• Your expected churn rate (specific to recurring revenue).

3. Create initial estimates

It’s easy to get hung up on this step. 

Even if you are not a numbers person, you can do this correctly by going with your best estimates .

This is where industry benchmarks and previous financial statements come in handy. They are your baseline. You just make adjustments from there.

And LivePlan makes this simple. You can:

• Run with a constant amount for the entire year. 
• Vary amounts for each month and fine-tune your projections.

If you’re unsure which method to use, look ahead. Where do you want sales to be in 3 months, 6 months, 1 year? 

Then answer the following:

• What increase in sales/customers do I need to reach this goal?
• Is the market large enough for me to reach it?
• What percent of the market do I think I can reasonably pick up?
• Are there seasonal factors that will affect sales?
• Will my pricing impact my ability to sell?

Those are just a few questions to consider. Answering them while creating your forecast will help you fine-tune projections month-to-month.

Tip: With LivePlan, you can enter each monthly total, use an annual percentage change, or drag and drop each month with the performance graph.    

4. Now for expenses

When adding expenses, start with your current budget (if you have one). If you’re unsure of what your expenses are—use LivePlan Assistant to generate recommendations .

Once you have your list of expenses, adding them to LivePlan is very straightforward. 

• Create a name.
• A dollar amount ($)
• % of overall revenue
• % of specific revenue streams
• Determine if the cost is constant, varies over time, or is a one-time expense.
• Add how much it costs.
• Categorize it as rent/lease, marketing, or other expenses.

Tips when entering expenses

Your expense forecast should help you set spending limits. We recommend the following to make this possible. 

• Start with fixed expenses: 

These are often the largest and most essential expenses (like rent). They’re also the easiest for you to forecast confidently.  

• Add variable expenses as % of revenue:  

To get the most value from an expense forecast, you should tie variable expenses to revenue whenever possible. 

This allows you to set limits that are reasonable, even when your sales fluctuate. And makes adjustments much simpler. 

• Address Direct Costs and Personnel separately: You are currently forecasting operational expenses—what it takes to run your business. You should forecast direct costs (costs directly tied to the production of goods/services) and personnel separately. 

LivePlan already separates these expenses for you to help you easily calculate additional targets like your margins and headcount. 

Need better business insights?

Remember, these are estimates . Your best guesses based on research, experience, and goals. They may end up being wrong, and that’s ok. 

If they’re helping guide your decisions and getting you more familiar with your business—then you’re forecasting correctly . And over time, you will get better at predicting performance. 

It just takes practice. Plus, having a tool that makes creating and reviewing your forecast easier doesn’t hurt either.

LivePlan guides you through adding assets, dividends, taxes, financing, and collection/payment terms—alongside your revenue and expenses. Providing you with a complete picture of your projected cash and profitability. Sign up today and easily build a useful and complete forecast. No accounting experience required.

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Business planning startup Pigment raises $145M in rare French tech mega-round

Paris-based startup Pigment has raised a $145 million funding round just five years after its inception. The enterprise software company offers a business planning platform for large companies to visualize their past financial performance and forecast upcoming quarters.

This funding round comes as a bit of a surprise as large rounds have been few and far between in France. According to a recent study from EY , funding rounds in the French tech ecosystem were down 38% in 2023 compared to 2022.

But if you remove buzzy AI startups like Mistral AI and capital-intensive infrastructure plays that are not really tech startups, like EV charging networks (Driveco) and EV battery factories (Verkor), funding rounds are drastically down. Pure software startups have had a rough couple of years.

Pigment appears as an exception with its Series D. Existing investor Iconiq Growth is doubling down by leading this new funding round. Sandberg Bernthal Venture Partners, IVP, Meritech, Greenoaks and Felix Capital are also participating — many of them were existing investors too.

And there’s a reason why Pigment managed to raise so much at a significantly higher valuation less than a year after its previous funding round . In 2023, the startup managed to triple its revenue and double its customer base with well-known clients like Unilever, Datadog, Kayak and Merck. Half of Pigment’s clients are based in the U.S.

“Our current investors told us ‘if you’re going to raise money in 18 months to scale with others, we might as well offer you great terms right now for an internal round.’ And everything happened very quickly … In one week, it was a done deal,” co-founder and co-CEO Eléonore Crespo told me.

Before Pigment, Crespo worked for VC firm Index Ventures and Google. She co-founded Pigment with Romain Niccoli, who was the co-founder and CTO of adtech startup Criteo — an early success of the French tech ecosystem.

“IVP — one of our backers — benchmarks the growth rate of all SaaS companies. And since we’ve been selling our product, we’ve been in the top 5% of SaaS companies with the best growth rate ever, in terms of revenue growth,” Crespo said.

Image Credits: Pigment

Pigment is a flexible business planning tool that is used by chief financial officers and finance teams to create reports and budgets. It’s a modern SaaS platform, meaning that you can integrate it with all your company’s data (ERP, HRIS, data lakes, etc.) and use it as a collaboration tool.

In addition to finance teams, sales teams can use Pigment to create quotas and see how everyone is performing against quarterly quotas. HR teams can see how they should scale the workforce up and down based on strategic changes and financial objectives.

“We’ve done a lot of work to address other teams, not just finance teams. We’ve developed a lot of modules that enable us to serve HR teams, supply chain teams and sales teams,” Crespo said.

In fact, as more teams start using Pigment, it becomes an important tool for cross-team collaboration. And it’s supposed to work better than legacy tools from Oracle and SAP.

Like many software companies, Pigment has also added AI features. As Pigment acts as the central repository for all the important metrics of a company, customers can ask questions to Pigment AI in natural language to get a quick answer. Examples include “Can you give me a breakdown of revenue per country?” or “Why was our actual revenue lower than our forecast last quarter for this product?”

But more importantly, the company has optimized its core product so that it works well even with large datasets and complicated calculations. The best enterprise software products are must-have products, which means that companies usually don’t need to spend a lot of resources on improving the product — clients need this tool to operate. Pigment is still the challenger in this industry, so it believes it needs to provide a better product to compete with other business planning products.

EV startup Canoo's 2024 revenue forecast disappoints, shares tumble

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Granth reports on the North American Consumer and Retail sector, covering a broad range of companies from consumer packaged goods and restaurants to department stores and apparel retailers. Granth's work on the website usually appears on the Retail & Consumer page of Reuters Business section. He holds a post-graduate degree in international relations and area studies and has previously worked as a research analyst.

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Amid dismal revenue forecast, Healey administration plans to freeze state hiring

Governor Maura Healey plans to institute a freeze on hiring in portions of the state government lasting at least through the end of the fiscal year in June, according to three sources with direct knowledge of the plan, another sign the state’s rocky financial situation hasn’t improved.

The freeze, which is expected to take effect Wednesday, comes just hours before the administration is slated to release its latest revenue projections, and could indicate that tax collections continue to lag behind the projections state officials use to budget public services.

Some details of the freeze remained unclear, including how much money the Healey administration expects to save with the move.

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In a statement to the Globe, Healey’s budget chief Matthew Gorzkowicz confirmed the move but characterized it as “hiring controls.” He said the Healey administration is taking the action “as one tool at our disposal to responsibly manage spending over the next three months.”

“These hiring controls, while temporary, will help ensure that the administration can balance the budget at the end of the year and preserve critical funding for core programs and services,” Gorzkowicz said.

Certain positions, including those in direct care and public safety, will be exempt, according to officials in Healey’s budget office. So are seasonal hires, positions that have to be filled due to a court order or settlement, returns from leave, and new hires who received offer letters before April 3.

All other hiring will be subject to approval by Healey’s budget office, officials said, adding that the administration is not considering additional spending cuts “at this time.”

State tax revenues have been sliding since last year, with collections now running below projections for eight straight months. Even after the Healey administration downgraded the state’s tax forecast at the start of the calendar year, revenue collections through February were still $275 million below even those lowered projections.

Officials on Beacon Hill closely monitor the monthly revenue figures, particularly as the House and Senate prepare to craft budget plans for the next fiscal year in the coming months.

In January, Healey unveiled her own budget bill, a $58 billion plan that would increase spending by about $2 billion over the current budget, or about 3.7 percent. That’s below increases of the past years, which Healey cited as evidence that officials are “tightening our belts” after a period of soaring revenues during the pandemic.

Then in January, Healey, citing lower-than-expected tax revenue collections, slashed $375 million in spending, cutting hundreds of millions from programs that provide outreach for seniors, behavioral health supports, homeless shelters, and other services.

In a letter to lawmakers at the time, Healey said the cuts won’t have an impact on school funding or local aid, nor are state officials planning to lay off any government employees.

At the same time, her budget office also lowered the amount of tax revenue it expected to collect this fiscal year by $1 billion. Revenues at the time were running $769 million, or about 4 percent, behind the state’s original projections midway through the current fiscal year.

After years of sometimes record-breaking budget surpluses, tax revenues began tailing off in 2023. The state’s take plummeted last April before it ended the fiscal year, having collected roughly $600 million less than it expected.

The vast majority of that shortfall, roughly $593 million, involved lower-than-expected collections of capital gains taxes, a volatile revenue source, officials said at the time.

At the same time, costs to state continue to mount. For example, the state projects it will spend $915 million in the next fiscal year for its struggling emergency shelter system, which has been overwhelmed by an influx of homeless and migrant families. And a spending bill moving through the Legislature would allow the governor to dip into the roughly $850 million left in a state escrow account that contains the remnants of last year’s multibillion-dollar surplus.

This would not be the first time an administration paused hiring to address a budget hole.

In 2015, then-governor Charlie Baker implemented a state hiring freeze for nonessential workers just over 24 hours after he was sworn in.

At the time, Baker said in a statement that the state’s deficit “proves that Massachusetts is facing a spending problem that must be remedied.”

Emma Platoff of the Globe staff contributed to this report.

Samantha J. Gross can be reached at [email protected] . Follow her @samanthajgross . Matt Stout can be reached at [email protected] . Follow him @mattpstout .

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IR-2024-88, April 2, 2024

WASHINGTON — With the April 15 tax deadline approaching, the IRS reminds taxpayers there is still time file their federal income tax return electronically and request direct deposit.

Filing electronically reduces tax return errors as tax software does the calculations, flags common errors and prompts taxpayers for missing information. Most people qualify for electronic filing at no cost and, when they choose direct deposit, receive their refund within 21 days.

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Taxpayers with income of $79,000 or less in 2023 can use IRS Free File guided tax software now through Oct 15. IRS Free Fillable forms , a part of this program, is available at no cost to taxpayers of any income level and provides electronic forms for people to fill out and e-file themselves.

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IRS reminds people they can avoid paying interest and some penalties by filing their tax return and, if they have a balance due, paying the total amount due by the tax deadline of Monday, April 15. For residents of Maine or Massachusetts, the tax deadline is Wednesday, April 17, due to Patriot’s Day and Emancipation Day holidays.

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Huawei Releases 2023 Annual Report: Performance in Line with Forecast

[Shenzhen, China, March 29, 2024] Huawei released its 2023 Annual Report today. The company reports that its performance was in line with forecast, having generated CNY704.2 billion in revenue and CNY87 billion in net profits. Throughout the past year, Huawei's ICT infrastructure business remained solid, and its consumer business met expectations. Both its cloud computing and digital power businesses grew steadily, and its intelligent automotive solution business began large-scale delivery.

Huawei values research and innovation. In 2023, the company invested CNY164.7 billion back into R&D, which accounted for 23.4% of its annual revenue. Altogether, the company's R&D investment over the past decade amounts to CNY1.11 trillion.

"The company's performance in 2023 was in line with forecast," said Ken Hu, Huawei's Rotating Chairman. "We've been through a lot over the past few years. But through one challenge after another, we've managed to grow. The trust and support of our customers, partners, and friends around the world is what helped us keep going, keep surviving, and keep growing."

2023 revenue by business: The ICT infrastructure business generated CNY362 billion, up 2.3% YoY. The consumer business recorded CNY251.5 billion, up 17.3% YoY. The cloud computing business brought in CNY55.3 billion, up 21.9% YoY. The digital power business earned CNY52.6 billion, up 3.5% YoY. The intelligent automotive solution business generated CNY4.7 billion, up 128.1% YoY.

Moving forward, Huawei will keep investing in technology and open innovation to advance technology and help different industries modernize. Committed to succeeding through quality, the company will work hard to make quality one of its core competitive strengths. In its engagement with 9.5 million developers and 46,000 ecosystem partners around the world, Huawei strongly advocates for open collaboration and helping others succeed. With this approach, the company will continue to focus on developing core ICT technologies, as well as building up platform capabilities for complex hardware and sophisticated software systems, which are then opened up to partners to promote shared success.

"A new journey awaits us in 2024," Hu concluded. "We will create greater value for our customers and society by driving open innovation, building thriving ecosystems, and succeeding through quality. Here I'd like to thank those who have joined us – and will join us – along the way. Together, let's make something extraordinary. Let's build a fully connected, intelligent world."

All financial statements in the 2023 Annual Report were independently audited by KPMG, an international Big Four accounting firm. To download the 2023 Annual Report, please visit https://www.huawei.com/en/annual-report/2023

Note: The 2023 closing exchange rate is US$1.00 = CNY 7.0808

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Trump's coming stock bust

If you want to know how Trump Media will do, look at the right-wing SPACs that came before it.

Donald Trump's newly public social-media company is not the next Nvidia — or Meta or Google or whatever has happened with X/Twitter .

The share price of Trump Media and Technology Group, trading under the stock ticker DJT (because of course it is), surged following the completion of its SPAC merger last week. A SPAC, or a special-purpose acquisition company, is a shell company — in this case, Digital World Acquisition — that goes public with the intention of buying an actual company later. For a while, TMTG's market cap was in the $9 billion range, making it more valuable than Etsy and Hasbro. That bumped up the former president's net worth to $7 billion, though not in a way he can immediately take advantage of. Unless the company's board says otherwise, Trump can't sell his shares for six months.

If I were Trump, though, I would cajole the board to speed up that lockup period so I could cash in. It seems, let's say, unlikely that his media company's stock price is going to stay so high forever. (It seems like investors agree — on Monday, after this story was first published, the stock tumbled by more than 25%.)

For one thing, TMTG, which owns the conservative Twitter copycat Truth Social, makes basically nothing. According to a new financial filing from the company released on Monday, its total revenue was $4.1 million in 2023. Extrapolate that out, and the stock is trading at something like 2,000 times the company's annual revenue. That is, um, high. Apple, for example, trades at about seven times its total revenue. And given TMTG's paltry revenue, it actually lost $58 million last year.

Trump's company says it has bigger plans ahead, such as growing Truth Social and developing "one or more additional cutting-edge products and/or services" to complement Truth, including some sort of video-streaming situation that "provides a 'home' for cancelled content creators." What exactly this might look like, or how many people would flock to it, isn't clear.

Truth Social had an estimated 5 million monthly website visits in February of this year, according to third-party trackers, but the company isn't revealing exact metrics right now. By comparison, Facebook had 845 million monthly active users when it went public in 2012, and Twitter had 215 million when it IPO'd the following year. The long and the short of it is that TMTG is not a thriving business.

But maybe other social-media outlets, which are designed to appeal to the widest possible base, aren't the right comparison. Truth Social and any other business Trump Media and Technology Group spins up is pretty much guaranteed to appeal just to Trump fans.

Trump's media company isn't the first conservative outfit to go public via SPAC in recent years and try to make money off of right-leaning consumers and investors . Its predecessors have not done so hot. Rumble, a Peter Thiel-backed YouTube for the right, rose by some 40% on its first day of trading in September 2022 and has been hanging well below that ever since. Both Black Rifle Coffee, a Starbucks for Republicans, and Public Square, the GOP's supposed alternative to Amazon, have followed similar trajectories: a stock pop early on, then sitting under $10 ever since. None of them have achieved sustained profitability, though Black Rifle says it's on the path to it.

I'd guess Trump has much better odds of winning the White House (or ending up with some criminal convictions) than he does seeing his mediocre social-media company take off.

Being in the business of anti-woke is not especially lucrative. As much as people say they want to shop and invest their values, it often doesn't turn out to be the case. Instead, most people opt for the convenient option and whatever they're most used to doing already. There's a reason most boycotts don't work — people are busy and tired. It's true on the left as well. Dig deep enough, and every company in the world can probably give you a reason not to want to give them your money.

Might Trump and Truth Social be different, at least on the stock front? I mean, I suppose anything is possible. As my colleague Peter Kafka points out, investors aren't shorting the stock en masse yet , in part because doing so is hard and in part because you can see DJT taking off with the meme-stock crowd. GameStop and AMC weren't doing particularly awesome from a business sense when they achieved meme status, yet small-time investors were eager to pile into them. For a good chunk of the country, tossing some cash into Trump's company is not only a way to stick it to The Man but also to The Woke Man. Trump has also spent years insisting that his literal name is worth a ton of money, and I guess we're about to find out just how much.

Still, I'd guess Trump has much better odds of winning the White House (or ending up with some criminal convictions) than he does seeing his mediocre social-media company take off. He might want to call up someone on TMTG's board — say, his son Don Jr. — and see about them getting a meeting on the books to let him start offloading shares sooner rather than later.

Emily Stewart is a senior correspondent at Business Insider, writing about business and the economy.

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EV Startup Canoo's 2024 Revenue Forecast Disappoints, Shares Tumble

EV Startup Canoo's 2024 Revenue Forecast Disappoints, Shares Tumble

FILE PHOTO: A general view shows a Canoo LV (Lifestyle Vehicle) electric vehicle outside a manufacturing site in Livonia, Michigan, U.S. November 29, 2022. REUTERS/Rebecca Cook/File Photo

By Granth Vanaik and Abhirup Roy

(Reuters) -Electric vehicle maker Canoo forecast 2024 revenue well below analyst expectations on Monday, amid a broader slowdown in demand for battery-powered cars that has hit startups and forced major automakers to push back EV investment plans.

Shares in Canoo, which also warned for the eighth straight quarter about its dwindling capital and ability to continue as a going concern without additional funding, fell 38% in extended trading.

The EV industry has been struggling as high-interest rates to curb inflation have soured consumer appetite for EVs - typically more expensive than their gas-powered counterparts - and prompted automakers, including market leader Tesla, to slash prices in order to stoke demand.

Texas-based Canoo, a supplier of electric delivery vans to Walmart and crew transportation vehicles to NASA, first warned investors in 2022 on substantial doubt about its ability to remain a going concern and has since been raising capital to support production.

"We will continue to make progress towards accessing additional forms of debt and other non-dilutive forms of capital as we move into 2024," CFO Greg Ethridge said on a post-earnings call. "Let's be very clear. We'll only raise the capital that we need."

But with uncertain demand and several startups shutting shop, investors in EV makers have grown cautious, in turn making it difficult for firms to raise more money.

Cash-strapped Fisker said last month its talks with a large automaker for a potential deal had collapsed and the New York Stock Exchange said it planned to delist its shares due to "abnormally low" price levels.

Canoo had also implemented a reverse stock split in March as it sought to regain compliance with the minimum $1 bid price requirement of the Nasdaq exchange.

Canoo said it expects full-year 2024 revenue to be between $50 million and $100 million, below analysts' expectations of $152.5 million, according to LSEG data.

The company reported a net loss of $302.6 million, or 53 cents per share, for the year ended Dec. 31, compared with $487.7 million, or $1.81 per share, a year earlier.

(Reporting by Granth Vanaik in Bengaluru and Abhirup Roy in San Francisco; Additonal reporting by Priyanka G; Editing by Alan Barona)

Copyright 2024 Thomson Reuters .

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